Atwood had prepared a financial forecast for Mary Washington Pediatrics based on their expectations for financial improvement (see Exhibit 3). The plan included the following assumptions: (1) revenue would grow above expected inflation for the next seven years with a peak of 5%; (2) operating margins would be improved with careful attention to wasteful and unnecessary expenditures; and (3) investment in current assets could be reduced dramatically with better cash, upgraded inventory supplies management, and improved bill collection, such that the investment in working capital would decline from a net working capital turnover of 5 to over 10 times by 2019. Atwood recognized that the equipment used in the practice was wildly out of date. She had included large investments for office equipment in the projection. Lastly, her assumption for physician salary was that it would grow with net revenue. It was now Juarez's turn to put a value on the forecast. She had spent some time earlier working through a cost of capital estimate. A 9% rate resonated with her, and was confirmed with an email from her parents. An additional concern was financing the deal. She and Atwood each had $250,000 in savings that they could combine for the purchase. The rest of the deal, however, they expected to finance with debt. With all that she knew from growing up in her parents' household, Juarez believed she had the wherewithal to put the financing together and expected that she could get a seven-year note at a 5% interest rate to fund the deal. Exhibit 3 Mary Washington Pediatrics Atwood's Financial Forecast for Mary Washington Pediatrics (financial figures in thousands of US dollars) 2016 2017 2018 2019 2020 2021 2022 2023 Revenue growth 0.5% 3.0% 5.0% 5.0% 5.0% 3.0% 3.0% 2.0% Operating expenses/ revenue 57.4% 57.4% 57.0% 56.5% 56.0% 54.0% 53.0% 53.0% Net working capital 315.9 272.1 214.2 176.5 181.9 185.5 189.2 193.0 Net equipment 326.3 375.1 415.1 455.1 475.1 498.2 484.2 464.6 Depreciation 10.4 14.0 20.0 28.0 37.0 42.0 42.9 42.9 Capital expenditures 4.1 62.8 60.0 68.0 57.0 65.1 28.9 23.3 Net revenue 1,602 1,682 1,766 1,854 1,910 1,967 2,007 Operating expenses 920 959 998 1,038 1,031 1,043 1,064 Depreciation 14 20 28 37 42 43 43 Physician salary 500 525 551 579 596 614 626 Operating profit 168 178 189 200 240 268 274 3. How could you use a DCF-based estimate for the practice value? Based on case Exhibit 3, what is the free cash flow expected for each year? As suggested in the reading: Free cash flow = Operating profit (1 - tax rate) Change in net working capital (NWC) - Change in net equipment. b. How would you estimate a terminal value for the practice in 2023?