10 May WHAT IMPACT WOULD THIS CHANGE HAVE ON THE EQUITY VALUE?
18.5 Assume that you have been asked to place a value on the fund capital (equity) of best health a not-for-profit HMO. Its projected profit and loss statements and equity reinvestment (asset) requirements are as follows (in millions): 2012 2013 2014 2015 2016Net revenues $50.0 $52.0 $54.0 $57.0 $60.0Cash expenses 45.0 46.0 47.0 48.0 49.0Depreciation 3.0 3.0 4.0 4.0 4.0Interest 1.5 1.5 2.0 2.0 2.5Net profit $ 0.5 $1.5 $1.0 $3.0 $4.5Asset requirements $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 0.4The cost of equity of similar for-profit HMO’s is 14 percent while the best estimate for BestHealth’s long-term growth rate is 5 percent.a. What is the equity value of the HMO?b. Suppose that it was not necessary to retain any of the operating income in the business. What impact would this change have on the equity value?
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