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

Briarwood’s cost of equity is 16 percent. The best estimate for Briarwood’s long-term growth rate is 4 percent.

a. What is the equity value of the hospital?

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? What if the growth rate were only 2 percent?

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2005 2006 2007 2008 2009 $225.0 $240.0 $250.0 $260.0 $275.0 200.0 205.0 210.0 215.0 225.0 11.0 12.0 13.0 14.0 15.0 Earnings before interest and taxes (EBIT) $ 14.0 $ 23.0 $ 27.0 $ 31.0 $ 35.0 Net revenues Cash expenses Depreciation Interest Earnings before taxes (EBT) Taxes (40 percent) Net profit Asset requirements 8.0 $ 9.0 9.0 10.0 10.0 6.0 S 14.0 $ 18.0 $ 21.0 $ 25.0 2.4 8.4 10.0 5.6 7.2 $ 3.6 S 8.4 $ 10.8 $ 12.6 $ 15.0 $ 6.0 S 6.0 $ 6.0 $ 6.0 $ 6.0