EverHealth's cost of equity is 16 percent, its cost of debt is 10 percent, and its optimal capital structure is 40 percent debt and 60 percent equity. The best estimate for Briarwood's long-term growth rate is 4 percent. Furthermore, the hospital currently has $80 million in debt outstanding.
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 according to the FOCF method? What if the growth rate were only 2 percent? Year 1 Year 2 Year 3 Year 4 Year 5 Net revenues $225.0 $240.0 $250.0 $260.0 $275.0 Cash expenses $200.0 $205.0 $210.0 $215.0 $225.0 Depreciation $11.0 $12.0 $13.0 $14.0 $15.0 Earnings before interest and taxes $14.0 $23.0 $27.0 $31.0 $35.0 Interest $8.0 $9.0 $9.0 $10.0 $10.0 Earnings before taxes $6.0 $14.0 $18.0 $21.0 $25.0 Taxes (40 percent) $2.4 $5.6 $7.2 $8.4 $10.0 Net profit $3.6 $8.4 $10.8 $12.6 $15.0 Estimated retentions $10.0 $10.0 $10.0 $10.0 $10.0
EverHealth's cost of equity is 16 percent, its cost of debt is 10 percent, and its optimal capital structure is 40 percent debt and 60 percent equity. The best estimate for Briarwood's long-term growth rate is 4 percent. Furthermore, the hospital currently has $80 million in debt outstanding.
| 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 according to the FOCF method? What if the growth rate were only 2 percent? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Related questions
Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)
| 2015 | 2014 | ||
| Sales | $1,100.0 | $1,000.0 | |
| Operating costs excluding depreciation | 825.0 | 850.0 | |
| Depreciation and amortization | 27.0 | 21.0 | |
| Earnings before interest and taxes | $248.0 | $129.0 | |
| Less: Interest | 24.0 | 22.0 | |
| Pre-tax income | $224.0 | $107.0 | |
| Taxes (40%) | 89.6 | 42.8 | |
| Net income available to common stockholders | $134.4 | $64.2 | |
| Common dividends | $121.0 | $51.0 |
Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)
| 2015 | 2014 | ||
| Assets | |||
| Cash | $15.0 | $12.0 | |
| Short-term investments | 6.0 | 5.0 | |
| Accounts receivable | 138.0 | 120.0 | |
| Inventories | 173.0 | 150.0 | |
| Total current assets | $332.0 | $287.0 | |
| Net plant and equipment | 273.0 | 210.0 | |
| Total assets | $605.0 | $497.0 | |
| Liabilities and Equity | |||
| Accounts payable | $88.0 | $80.0 | |
| Accruals | 91.0 | 70.0 | |
| Notes payable | 22.0 | 20.0 | |
| Total current liabilities | $201.0 | $170.0 | |
| Long-term bonds | 220.0 | 200.0 | |
| Total liabilities | $421.0 | $370.0 | |
| Common stock | 150.6 | 107.0 | |
| Retained earnings | 33.4 | 20.0 | |
| Total common equity | $184.0 | $127.0 | |
| Total liabilities and equity | $605.0 | $497.0 | |
a. What is the net operating profit after taxes (NOPAT) for 2015? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$ million
b. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2015 $ million
2014 $ million
c. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2015 $ million
2014 $ million
d. What is the free cash flow for 2015? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$ million
e. What is the ROIC for 2015? Round your answer to two decimal places.
%
f. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
| After-tax interest payment | $ million |
| Reduction (increase) in debt | $ million |
| Payment of dividends | $ million |
| Repurchase (Issue) stock | $ million |
| Purchase (Sale) of short-term investments | $ million |
