Question
You have been called in to value a dental practice by an old friend and have been provided with the following information: The practice generated
You have been called in to value a dental practice by an old friend and have been provided with the following information:
The practice generated pre-tax income of $ 550,000 last year for the dentist, after meeting all office expenses. The income is expected to grow at 2% in perpetuity, with no reinvestment needed. The tax rate is 40%.
The dentist currently spends about 20 hours a week doing the accounting and administrative work. You estimate that hiring an external accounting service will cost you $25,000 annually. As an alternative to private practice, the dentist could work at a dental hospital nearby at an annual salary of $ 150,000. (Neither was considered when estimating the income above.)
The office is run out of a building owned by the dentist. While no charge was assessed for the building in computing the income, you estimate that renting the space would have cost you $75,000 a year.
The unlevered beta of publicly traded medical service companies is 0.80 but only 1/3 of the risk in these companies is market risk. The dental practice has no debt. (You can use a riskfree rate of 4.25% and a risk premium of 4%.) Estimate the value of the practice for sale in a private transaction to another dentist who is not diversified.
The appropriate beta to be used in this valuation to get cost of equity would be:
a. | 0.8 | |
b. | 1.39 | |
c. | 2.4 | |
d. | 2.7 |
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