fin 451 !!!

University of Virginia Health System: The Long-Term Acute Care Hospital Project

Warning: This case looks easy when you see there are so few pages. And while it is not hard, it is more involved than you would expect. Make sure to allocate the appropriate amount of time to work out all of the solutions.

1. Compute the WACC for the project.

Rf = 4.72%

(rm – rf) = 5.28%

Rm = 5%

Beta = 0.65（average for health）

Rs = 4.902%

Rd = 5.38% (Rating: AA)

Total Asset = 2800 * 18250 = 51,100,000

Total Lib = $65250 * 62 + 19.3% (Supplies Drugs) + 9% (management fee) + 200,000 (lease) + 15million + 1.2Million + 8.5% (utilities)

E = 13153410 – 9276533 = 3876607

D =

Can’t find the Total debt from this case, then use other way to find. Our team think probably can use the average weight from other six companies.

Thus, total debt is known, total equity is market cap

So, the Wd is total debt / (total debt + market cap)

Wd(average) = ( 28.23% + 33.98% + 15.00% + 21.61% + 32.63% + 16.58%)/6=24.67%

We(average) = 1-Wd = 75.33%

Tc = 0 (School is non-tax rate)

WACC = (E/V*rs)+(D/V*rd*(1-tc))

=(75.33%*4.902%)+(24.67%*5.38%*(1-0))

=5.02%

2. What special considerations should we consider in WACC? (Hint: does the hospitals relation to a University affect WACC in any specific way?)

The relationship between hospitals and universities will affect WACC. The tax rate of university hospitals is 0, which will greatly affect the calculated value of WACC. If the tax rate is adjusted to 30%, WACC will be reduced from 5.02% to 4.69%

3. Without computing them first, identify any marginal (additional) costs or benefits that would be incurred by taking on this project? Complete the following chart by filling in costs and benefits that will affect the four components of FCF. (Just put the name of the cost/benefit, no need for numbers)

EBIT (These are benefits and costs that arise from operations)	Depreciation (DEP: A cost the arises from the age of fixed assets)
Place each cost associated with EBIT here Supplies, drugs and food for patient care Days used Increase payers	Place each cost associated with DEP here beds
Capital Expenditure (CAPEX : long-term costs usually associated with equipment)	Net Operating Working Capital (NOWC: Sort-term costs that can usually be recovered, like inventory)
Place each cost associated with CAPEX here Land lease construction	Place each cost associated with NOWC here salary Management fees

4. Using the information provided in the memo from Karen Mulroney, estimate revenue increases from the addition of the new hospital.

Net profit is positive growth

By calculating Payback, we get payback period = 1.01

So the new hospital is growing very high, thus recommend to build.

5. Using all of the information above, attempt to compute the FCF for the LTAC project.

In Excel

6. Compute IRR and NPV for the given FCF computed in question 5.

In Excel

7. Recompute question 4 (duplicate your excel document and change the numbers), but assume that the number of beds increase to 40 (rather than 50, keep utilization and costs the same). Would this change your recommendation?

Continue to calculate Payback, get payback period = 2.26

So it won't change the recommendation