# Briarwood

Assume that you have been asked to place a value on the ownership position in Briarwood Hospital. Its projected profit and loss statements and retention requirements are shown below (in millions):
The FCFE , free cash flow equity method, also describes as the equity residual method focuses solely on the cash flows available to the stockholders, i.e Net Profit, Plus depreciation, less equity retentions = FCFE

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

Briarwood’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.
a. What is the equity value of the hospital using the Free Operating Cash Flow (FOCF) method?
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?