Assume that you have been asked to place a value on the fund capital

(equity) of BestHealth, a not-for-profit HMO. Its projected profit and loss statements and equity reinvestment (asset) requirements are shown below (in millions):

The cost of equity of similar for-profit HMO’s is 14 percent, while the best estimate for BestHealth’s long-term growth rate is 5 percent.

a. What is the equity value of the HMO?

b. Suppose that it was not necessary to retain any of the operating income in the business. What impact would this change have on the equity value?

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2005 2006 2007 2008 2009 Net revenues $50.0 $52.0 $54.0 $57.0 $60.0 Cash expenses 45.0 46.0 47.0 48.0 49.0 Depreciation 3.0 3.0 4.0 4.0 4.0 Interest 1.5 1.5 2.0 2.0 2.5 Net profit $ 0.5 $ 1.5 $ 1.0 $ 3.0 $ 4.5 Asset requirements S 0.4 $ 0.4 $ 0.4 $ 0.4 $ 0.4