Assume that I 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 retention requirements areshown below (in millions):

Year 1 Year 2 Year 3 Year 4 Year 5

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

Estimated retentions $1.0 $1.0 $1.0 $1.0 $1.0

The cost of equity of similar for-profit HMO's is 14 percent, while BestHealth's cost of debt is 5 percent.

Its current capital structure is 60 percent debt and 40 percent equity. The best estimatefor BestHealth's long-term growth rate is 5 percent.

Furthermore, the HMO currently has$30 million in debt outstanding.

a. I need the equity value of the HMO using the free operating cash flow (FOCF) method. Please show work.

b. Suppose that it was not necessary to retain any of the operating income in the business. I need theimpact that this change have on the equity value according to the FOCF method. Please show work.