Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and equity reinvestment (asset) requirements are shown below (in millions):
Briarwood's cost of equity is 16 percent. The best estimate for
Briarwood's long-term growth rate is 4 percent.
a. What is the equity value of the hospital?
b. Suppose that the expected long-term growth rate was 6 percent.
What impact would this change have on the equity value of the business? What if the growth rate were only 2 percent?