18.5 Assume that you have been asked to place a value on the fund capital (equity) of best health, a not-for-profit HMO. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows (in millions):

2012 2013 2014 2015 2016

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 $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 0.4

The cost of equity of similar for-profit HMOs is 14 percent, while the best estimate for BestHealths 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?