Assume that you have been asked to place a value on the ownership position in Briarwood Hospital.

Question:

Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and retention requirements are shown below (in millions):

Briarwood's cost of equity is 16 percent, its cost of debt is 10 percent, and its optimal capital structure is 40 percent debt and 60 percent equity. The best estimate for Briarwood's long-term growth rate is 4 percent. Furthermore, the hospital currently has $80 million in debt outstanding.
a. What is the equity value of the hospital using the Free Operating Cash Flow (FOCF) method?
b. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have on the equity value of the business according to the FOCF method? What if the growth rate were only 2 percent?
c. What is the equity value of the hospital using the Free Cash Flow to Equity holders (FCFE) method?
d. Suppose that the expected long-term growth rate was 6 percent. What impact would this change have on the equity value of the business according to the FCFE method? What if the growth rate were only 2percent?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...