Assume you are conducting a discounted cash flow valuation of Family Health Associates. You have assembled the following financial information (all numbers are in millions): The after- tax cost of debt is 7 percent, the cost of equity is 19 percent, and the weighted average cost of capital is 14.2 percent.

2012 2013 2014 2015

Net profit

$3.00

$3.20

$4.00

$5.20

Depreciation

6

6

7

7

Retentions

3

4

5

6

Terminal value

60

Now suppose it was not necessary to retain any of the operating income in the business. Relative to a scenario in which retentions are required, what would be the effect of not retaining income on the estimated equity value of the company?

a. Estimated value would increase. b. Estimated value would decrease.

c. Estimated value would not change.

d. Estimated value would be more uncertain.

e. The effect cannot be determined from the information provided.