Use the data contained in the case to estimate the postmerger cash flows for 2018 through 2022 assuming that Lafayette General Hospital is acquired by St. Benedict's Teaching Hospital. You have very limited data on which to base your forecasts. The key is to make supportable assumptions about the potential synergies that can be obtained from the merger. Also, any cost savings to St. Benedict's that result from the merger must be included in the analysis. (Hint: Use embedded interest expense in your forecast, but do not include any interest to fund the acquisition.)

Question 1 Use the data contained in the case to estimate the postmerger cash flows for 2018 through 2022 assuming that Lafayette General Hospital is acquired by St. Benedict's Teaching Hospital. You have very limited data on which to base your forecasts. The key is to make supportable assumptions about the potential synergies that can be obtained from the merger. Also, any cost savings to St. Benedict'sthat result from the merger must be included in the analysis. (Hint: Use embedded interest expense in your forecast, but do not include any interest to fund the acquisition.) Model CASE 30 ST. JOSEPH'S TEACHING HOSPITAL: Merger Analysis Model with Questions, Student Version This case consists of a valuation analysis on a 400-bed acute care hospital. The model uses both discounted cash flow (DCF) and market multiple methodologies for the valuation. The DCF method focuses on cash flows to equityholders. The INPUT DATA section ofthe model contains key assumptions needed to generate the pro forma (forecasted) cash flow statements. In addition, historical data used in the forecasting process is contained in its own section. The model consists of a complete base case analysis--no changes need to be made to the existing MODEL-GENERATED DATA section. However, values in the INPUT DATA section ofthe student spreadsheet have been replaced by zeros. Students must select appropriate input values and enter them into the cells with values colored red. After this is done, any error cells will be corrected and the base case solution will appear. The KEY OUTPUT section includes the most important output from the MODEL-GENERATED DATA section. INPUT DATA: KEY OUTPUT: (millions of $) (millions of $) Cash flow data: Pro forma (forecasted) net cash ows: Growth in revenues (2018-2022): 2018 $100.236 Inpatient 0% 2019 $100236 Outpatient 0% 2020 $100236 Nonoperating 0% 2021 $100.236 Page 1 Model Patient services exp as a 2022 #DIV/O! % of net patient rev 0% Percent of net CF 2018 EBITDA $100.236 retained for growth 0% Average 5-yr EBITDA #DIV/O! Annual inputs: *Interest on **Interest on ***Cost Saving Acquisition value: Year Current Debt Required Loans at Acquirer 2018 $0.000 $0.000 $0.000 DCF method #DIV/O! 2019 $0.000 $0.000 $0.000 Market multiple method: 2020 $0.000 $0.000 $0.000 Applied to 2014 EBITDA $0.000 2021 $0.000 $0.000 $0.000 Applied to avg EBITDA #DIV/O! 2022 $0.000 $0.000 $0.000 Applied to discharges $0.000 Long-term (2019 and beyond) *Interest on Lafayette General's current debt. constant growth rate 0% **Interest on any borrowings required to expand Market data: the asset base or to fund the acquisition. Discount rate (cost of equity) 0% EBITDA multiple 0 ***Cost savings at St. Benedict's due to any Market value to discharges ratio $0 synergistic benefits that will accrue at the acquirer as opposed to at the target. Operating data: Expected number of discharges 0 HISTORICAL DATA: Lexington General Hospital Historical Income Statements: (Millions of Dollars) 2013 2014 2015 2016 2017 Page 2Model Inpatient revenue $42472 $46014 $53410 $58650 $59513 Outpatient revenue 28.314 30.676 35.606 39.100 39.675 Net patient service revenue $70786 $76690 $89016 $97.750 $99.188 Nonoperating revenue 1.922 1.515 1.367 1.725 1.048 Total revenues $72708 $78205 $90383 $99475 $100236 Patient services expenses $60245 $73858 $81525 $90645 $89505 Interest expense 3.045 3.147 3.093 3.002 2.980 Depreciation 3.466 3.689 4.395 4.258 6.031 Total expenses $66756 $80694 $89013 $97905 $98516 Net income $5.952 ($2.489) $1.370 $1.570 $1.720 MODEL-GENERATED DATA: Lexington General Hospital Pro Forma (Forecasted) Cash Flow Statements: (Millions of Dollars) 2018 2019 2020 2021 2022 Inpatient revenue $59513 $59513 $59513 $59513 $59513 Outpatient revenue 39.675 39.675 39.675 39.675 39.675 Net patient service revenue $99188 $99188 $99188 $99188 $99188 Nonoperating revenue 1.048 1.048 1.048 1.048 1.048 Total revenues $100236 $100236 $100236 $100236 $100236 Patient services expenses $0.00 $0.00 $0.00 $0.00 $0.00 Interest expense 0.000 0.000 0.000 0.000 0.000 Total expenses $0.000 $0.000 $0.000 $0.000 $0.000 Net operating cash ow $100236 $100236 $100236 $100236 $100236 Cost savings at teaching (other) hospital 0.000 0.000 0.000 0.000 0.000 Growth retentions 0.000 0.000 0.000 0.000 0.000 Terminal value #DIV/OI Page 3 Model Net cash flow to equityholders $100.236 $100.236 $100.236 $100.236 #DIV/O! EBITDA $100.236 $100.236 $100.236 $100.236 #DIV/O! Average 5-year EBITDA #DIV/O! Valuation Results: (Millions of Dollars) Value according to DCF method #DIV/O! Value according to market multiple method: Applied to 2014 EBITDA $0.000 Applied to average 2014-2018 EBITDA #DIV/O! Applied to number of discharges $0.000 Sensitivity of DCF Value to Terminal Growth Rate and Discount Rate Estimates: Discount Rate #DIV/O! 12% 13% 14% 15% 16% 17% 18% 1% $883.559 $810.454 $748.580 $695.531 $649.541 $609.289 $573.762 TV 2% $941.470 $857.027 $786.624 $727.020 $675.903 $631.577 $592.770 Growth 3% $1,012.249 $912.915 $831.584 $763.757 $706.320 $657.049 $614.312 Rate 4% $1, 100.724 $981.223 $885.536 $807.174 $741.807 $686.440 $638.931 5% $1,214.477 $1,066.607 $951.478 $859.274 $783.746 $720.729 $667.338 6% $1,366.148 $1,176.386 $1,033.906 $922.952 $834.073 $761.252 $700.479 7% $1,578.488 $1,322.759 $1,139.884 $1,002.550 $895.583 $809.880 $739.647 END Page 4Model Page 5