Part VII: Valui ng Equity Securities Case 7.1: North Bend Hospital Parsimonious forecasting of free cash flows Key concept: orth Bend Hospital (NBH) is a profitable, rapidly growing hospital system in the Pacific Northwest. Part of its growth strategy is to purchase physician prac- tices and integrate them into the NBH system while retaining the physicians as The CFO has entered into purchase discussions with Rogue River Medical Asso- (RRMA), a physician practice employing 15 physicians with various special ciates RRMA reported fiscal year 2015 revenues of s4,000,000, with a net operating profit Its December 31, 2015, financial revealed that nct oper- statements assets totaled $600,000 and debt totaled S400,000 ating The CFO of NBH estimates that RRMA revenue will grow at a rate of 10 percent per year for the next three years and then slow to a long-term growth rate of 3 percent. He thinks that physician compensation agreements will maintain a stable net operating profit margin and that the current margin will be able to be maintained indefinitely. Net operating assets are expected to grow at 5 percent per year for three years and then slow to 2 percent indefinitely. percent, but the CFo has been The current historical cost of 10 using a 12 percent hurdle rate for capital investments. RRMA has suggested that it would accept a purchase offer of S4 million. RRMA is willing to take a $500,000 initial payment, with the balance paid at the rate of S500,000 per year (payment includes implicit interest at 5 percent) until the purchase price is paid