Question
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
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 retention requirements are shown 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 estimate for BestHealth's long-term growth rate is 5 percent. Furthermore, the HMO currently has $30 million in debt outstanding.
Using the free operating cash flow (FOCF) method, calculate BestHealth's free operating cash flow in Year 1.
Write your answer in millions of dollars. Round to one decimal place.
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