We will be valuing Bolder for potential acquisition. You will work with cash flow forecasts, incorporate potential synergies, and value the hospital from both buyers and sellers perspective.

Public information for the hospital is provided below. Note that the cost of capital and long-term growth rates are both annual numbers and outstanding debt and all cash flows are in thousands of dollars.

	Boulder Hospital
Cost of capital	8%
LT growth rate	2%
Outstanding debt	$80,000

Most acquisition targets have private information that can be hidden from potential acquirers (when bad) or may not be credible (when good). Note that hiding materially relevant but damaging information can be illegal, but it still happens.

• Boulders private information (treat these like synergies; although this buzz word isn't technically correct without the merger):
  • The real value of their capital stock is lower than financial statements would suggest. The owner would need to spend an addition $80,000/year to address this problem. This would be added to retentions (along with expected depreciations).
  • Boulder hospital plans to introduce a new service line. This investment is expected to increase revenues by 1% beginning at time 1. This would also require an additional $150,000 investment at time 1 (Place these costs in the retentions line, the big difference between treating these as a retention or treating them like a "regular" costs is whether they are tax deductible...which isn't a big issue for nonprofit organizations and I'll keep this simple by placing all these costs in the retentions line).

The acquiring firm is also a nonprofit and has a 7% cost of capital and this information is public. The following plans, however, are super-secret (known to the acquirers, but not to the targets):

• Synergy 1: Your organization is good at cutting overhead costs. You plan to start by firing most of the administrators (they didn't go to Michigan, so this is clearly a great plan). The cost cutting strategies will result in a one-time charge of $100,000 at time 0, but will reduce overhead costs by 3% starting in year 2.
• Synergy 2: The acquirer can raise prices at Cowboy hospital by 2.6% beginning in year 2. (You can assume that revenues are simply p*q, so revenues would go up by 2.6%.)

Questions

1. This one isnt so much a question as a bunch of super-specific hints. For the next steps you will need to:
   1. Calculate the NOPAT, the net operating profits after taxes, since these are nonprofits and our models are simple, this is just our net income.
   2. Add back depreciation (if you treated it as a cost when calculating NOPATeither approach works because we have a tax rate of 0).
   3. Subtract retentions. This would include things like replacing capital equipment (you may use a simple forecasted depreciation as an estimate for this problem).
   4. Calculate a terminal value assuming a constant growth rate. This the current FOCF*(1+g)/(r-g).
   5. Calculate the FOCF for each year, take the NPV, and net out the market value of existing debt.
2. Incorporate the target hospitals private information and calculate the lowest value that they should be willing to accept. (I suggest making a copy of your base model from 1 and putting this in a separate worksheet.)
3. Calculate what the target hospital believe the acquirer is willing to pay.
4. How much is the acquirer willing to pay? This should be based upon what they know.

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P A B D E F G H L M N 1 Model Inputs ($1,000s) 2 3 General parameters Model outputs Cost of capital (annual) 8.0% Free operating cash flow value = Cost of capital (quarterly) 1.9% 6 Tax rate 0% 7 Market value of debt ($1,000s) $ 80,000.0 8 Long-term growth (Annual) 2% 9 Long-term growth (Quarterly) 0.5% 10 11 12 13 14 15 16 Projected Cash Flow Statements and Retention Estimates (in 1,000s of dollars) by quarter 17 1 2 3 3 4 5 6 7 8 9 10 11 12 18 Net revenues $ 660,619 S 673,244 $ 685,869 $ 698,494 $ 698,494 S 711,119 $ 723,744 S 736,369 $ 748,994 $ 761,619 S 774,244 $ 786,869 $ 799,494 19 Labor costs $ 260,731 S 263,213 $ 265,694 $ 268,175 $ 268,175 $ 270,656 $ 273,137 $275,619 $ 278.100 $ 280,581 $ S 283,062 $ 285,543 $ 288,025 20 Supply costs $ 76,381 S 77,653 $ 78,924 80,196 S 81,468 $ $ 82,739 S $ 84,011 $ 85,282 $ 86,554 S 87,826 $ 89,097 S 90,369 21 Overhead costs $ 92,949 s 93,938 $ 94.862 $ 95,721 S 96,513 5 $ 97,240 S 97,902 $ 98.498 $ 99,028 S 99,493 $ 99,892 $ 100,225 22 Depreciation $ $ 183,377 S 183,557 $ 183,737 S 183,916 S 184,096 $ 184,276 S 184,455 $ 184,635 184.815 S 184.994 $ 185,174 S 185,354 23 EBIT $ 47,180 S 54,883 $ 62,652 $ 70,486 S 78,386 $ 86,351 S $ 94,382 $ 102,479 $ 110,641 S 118,869 $ 127,163 $ 135,522 24 Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Net Income 47.180 S S 54,883 $ 62,652 $ 70,486 S 78,386 $ 86,351 S 94.382 $ 102,479 $ 110,641 S 118,869 $ 127,163 $ 135,522 26 27 Estimated retentions 28 29 Free Operating Cash Flow Calculations 30 1 2 3 4 5 6 7 8 9 10 11 12 31 EBIT (1-T) 32 Plus depreciation 33 Less retentions 34 Terminal value 35 Free operating cash flow 36 A B C D E H K L M M N 1 Model luputs ($1,000s) 2 3 General parameters Model outputs 4 Cost of capital (annual) 8.0% Free operating cash flow value- 6 Cost of capital (quarterly) 1.9% 6 Tux rate 0% 7 Market value of debt ($1,000) S 80,000.0 8 Long-term growth (Annual) 9 Long-term growth (Quarterly) 0.5% 10 11 12 13 14 15 16 Projected Cash Flow Statements and Retention Estimates (in 1.000s of dollars) by quarter 17 1 2 3 4 5 6 7 8 9 10 11 12 18 Net revenues S 660,619 S 673,244 S 685,869 S 698,494 S 711,119 S 723,744 S 736,369 $ 748,994 $ 761.619 $ 774.244 $ 786.869 $ 799.494 19 Labor costs $ 260,731 $ 263,213 S 265,694 S 268,175 S 270,656 S 273,137 S 275,619 $ 278.100 $ 280,581 $ 283,062 $ 283,062 $285,543 $ 285,543 $288,025 20 Supply costs S 76,381 S 77,653 S 78,924 S 80,196 S 81,468 S S 82,739 S S 84.011 S 85,282 $ 86,554 $ 87.X26 $ 89,097 $ 90,369 21 Overhead costs 92,949 93,93 S 94,862 S 95,721 S 96,513 S 97,240 S 97,902 S 98,498 5 5 99,028 $ 99,493 599,892 5100,225 22 Depreciation S 183.377 S 183,557 S_183.737 S 183,916 S 184,096 S 184.276 S 184.455 $184.635 S 184.815 $184.994 $185.174 S 185.354 23 EBIT S 47,180 S 54,883 S 62,652 S 70.486 S s 78,386 $ 86,351 S 94,382 $ 102,479 $ 110,641 $ 118,869 $ 127,163 $135,522 24 Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Net Income S 47,180 S 54,883 S 62,652 S 70,486 S 78,386 S 86,351 S 94.382 $ 102.479 $ 102,479 $ 110.641 $ 118,869 $ 127,163 $ 135,522 26 27 Estimated retentions 28 29 Free Operating Cash Flow Caleulations 30 1 2 3 S 7 X 9 10 11 12 31 EBIT (1) 32 Plus depreciation 33 Less retentions 34 Terminal value 35 Free operating cash flow 36 37 38 PV of target company 29 Market value of debt 40 Total equity value 41 Value to Boulder Value to Acquirer + 4 Microsoft E P A B D E F G H L M N 1 Model Inputs ($1,000s) 2 3 General parameters Model outputs Cost of capital (annual) 8.0% Free operating cash flow value = Cost of capital (quarterly) 1.9% 6 Tax rate 0% 7 Market value of debt ($1,000s) $ 80,000.0 8 Long-term growth (Annual) 2% 9 Long-term growth (Quarterly) 0.5% 10 11 12 13 14 15 16 Projected Cash Flow Statements and Retention Estimates (in 1,000s of dollars) by quarter 17 1 2 3 3 4 5 6 7 8 9 10 11 12 18 Net revenues $ 660,619 S 673,244 $ 685,869 $ 698,494 $ 698,494 S 711,119 $ 723,744 S 736,369 $ 748,994 $ 761,619 S 774,244 $ 786,869 $ 799,494 19 Labor costs $ 260,731 S 263,213 $ 265,694 $ 268,175 $ 268,175 $ 270,656 $ 273,137 $275,619 $ 278.100 $ 280,581 $ S 283,062 $ 285,543 $ 288,025 20 Supply costs $ 76,381 S 77,653 $ 78,924 80,196 S 81,468 $ $ 82,739 S $ 84,011 $ 85,282 $ 86,554 S 87,826 $ 89,097 S 90,369 21 Overhead costs $ 92,949 s 93,938 $ 94.862 $ 95,721 S 96,513 5 $ 97,240 S 97,902 $ 98.498 $ 99,028 S 99,493 $ 99,892 $ 100,225 22 Depreciation $ $ 183,377 S 183,557 $ 183,737 S 183,916 S 184,096 $ 184,276 S 184,455 $ 184,635 184.815 S 184.994 $ 185,174 S 185,354 23 EBIT $ 47,180 S 54,883 $ 62,652 $ 70,486 S 78,386 $ 86,351 S $ 94,382 $ 102,479 $ 110,641 S 118,869 $ 127,163 $ 135,522 24 Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Net Income 47.180 S S 54,883 $ 62,652 $ 70,486 S 78,386 $ 86,351 S 94.382 $ 102,479 $ 110,641 S 118,869 $ 127,163 $ 135,522 26 27 Estimated retentions 28 29 Free Operating Cash Flow Calculations 30 1 2 3 4 5 6 7 8 9 10 11 12 31 EBIT (1-T) 32 Plus depreciation 33 Less retentions 34 Terminal value 35 Free operating cash flow 36 A B C D E H K L M M N 1 Model luputs ($1,000s) 2 3 General parameters Model outputs 4 Cost of capital (annual) 8.0% Free operating cash flow value- 6 Cost of capital (quarterly) 1.9% 6 Tux rate 0% 7 Market value of debt ($1,000) S 80,000.0 8 Long-term growth (Annual) 9 Long-term growth (Quarterly) 0.5% 10 11 12 13 14 15 16 Projected Cash Flow Statements and Retention Estimates (in 1.000s of dollars) by quarter 17 1 2 3 4 5 6 7 8 9 10 11 12 18 Net revenues S 660,619 S 673,244 S 685,869 S 698,494 S 711,119 S 723,744 S 736,369 $ 748,994 $ 761.619 $ 774.244 $ 786.869 $ 799.494 19 Labor costs $ 260,731 $ 263,213 S 265,694 S 268,175 S 270,656 S 273,137 S 275,619 $ 278.100 $ 280,581 $ 283,062 $ 283,062 $285,543 $ 285,543 $288,025 20 Supply costs S 76,381 S 77,653 S 78,924 S 80,196 S 81,468 S S 82,739 S S 84.011 S 85,282 $ 86,554 $ 87.X26 $ 89,097 $ 90,369 21 Overhead costs 92,949 93,93 S 94,862 S 95,721 S 96,513 S 97,240 S 97,902 S 98,498 5 5 99,028 $ 99,493 599,892 5100,225 22 Depreciation S 183.377 S 183,557 S_183.737 S 183,916 S 184,096 S 184.276 S 184.455 $184.635 S 184.815 $184.994 $185.174 S 185.354 23 EBIT S 47,180 S 54,883 S 62,652 S 70.486 S s 78,386 $ 86,351 S 94,382 $ 102,479 $ 110,641 $ 118,869 $ 127,163 $135,522 24 Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Net Income S 47,180 S 54,883 S 62,652 S 70,486 S 78,386 S 86,351 S 94.382 $ 102.479 $ 102,479 $ 110.641 $ 118,869 $ 127,163 $ 135,522 26 27 Estimated retentions 28 29 Free Operating Cash Flow Caleulations 30 1 2 3 S 7 X 9 10 11 12 31 EBIT (1) 32 Plus depreciation 33 Less retentions 34 Terminal value 35 Free operating cash flow 36 37 38 PV of target company 29 Market value of debt 40 Total equity value 41 Value to Boulder Value to Acquirer + 4 Microsoft E