Question
Universal Health Care (UHC) is a company whose stock price has declined by 40% in the past year. In the current year, UHC earned $300
Universal Health Care (UHC) is a company whose stock price has declined by 40% in the past year. In the current year, UHC earned $300 million in pretax operating income on revenues of $10 billion. The new CEO of the firm has proposed cost-cutting measures she anticipates will save the firm $100 million in expenses, without any effect on revenues. Assume the firm is growing at a stable rate of 5% a year and that its cost of capital is 10%; neither number is expected to change as a consequence of the cost cutting. The firm’s tax rate is 40%. (You can assume that the firm reinvests $100 million each year and that this reinvestment will not change as the firm cuts costs.)
a. What effect will the cost cutting have on value?
b. What effect will the cost cutting have on value if the expected growth rate will drop to 4.5% as a consequence? (Some of the costs cut were designed to generate future growth.)
Step by Step Solution
3.34 Rating (163 Votes )
There are 3 Steps involved in it
Step: 1
a To determine the effect of the costcutting measures on the value of Universal Health Care UHC we n...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started