Also, compute a value for the target hospital (based just on the information you have) by assuming a weighted average cost of capital for your company of 10% and a terminal value of $50 million.

You are the head of strategic planning at a for-profit hospital company. Your responsibilities include acquisitions of hospitals for the company. Your company is interested in acquiring a for-profit hospital in a market in which you currently own two other hospitals. You gather with your analysts to assess what your company should be willing to pay for the hospital. Your analysts assemble a modified cash flow information about the target hospital’s performance during the last three years (presented in the table below).

You believe that the target hospital will benefit from the acquisition strategically. Make assumptions about these strategic benefits and how they translate into financial projections for cash flow for the target hospital in 2019 and 2020. Fill in values for all line items in the table accordingly. Briefly describe line items you believe will be affected and by how much. Be prepared to justify how you arrived at these numbers.

2016 2017 2018 2019 2020

Net revenues 100 103 106

Patient expenses 80 82.5 84.9

Other expenses 10 10.3 10.6

Depreciation 8 8 8

EBIT 2 2.2 2.5

Taxes (40%) 0.8 0.88 0.96

Net income 1.2 1.3 1.5

Plus depreciation 8 8 8

Cash flow 9.2 9.3 9.5

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