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):
2005 2006 2007 2008 2009Net revenues $225.0 $240.0 $250.0 $260.0 $275.0Cash expenses 200.0 205.0 210.0 215.0 225.0Depreciation 11.0 12.0 13.0 14.0 15.0Earnings before interest and taxes (EBIT) $ 14.0 $ 23.0 $ 27.0 $ 31.0 $ 35.0Interest 8.0 9.0 9.0 10.0 10.0Earnings before taxes (EBT) $ 6.0 $ 14.0 $ 18.0 $ 21.0 $ 25.0Taxes (40 percent) 2.4 5.6 7.2 8.4 10.0
Net profit $ 3.6 $ 8.4 $ 10.8 $ 12.6 $ 15.0
Asset requirements $ 6.0 $ 6.0 $ 6.0 $ 6.0 $ 6.0
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?