What is the equity value of the HMO using the Free Operating Cash Flow (FCOF) method?
Caiden
example-11.2-mna-detailed-mna-worksheet.xlsxInputData
| Historical cash flow statement | Ad hoc forecasts, based on trend line graphs (below), incorporating synergies | |||||||
| Items | 2005 | 2006 | 2007 | 2008 | 2009 | 6 | 7 | 8 |
| Net patient revenues | $163 | $175 | $182 | $193 | $210 | $218 | $232 | $243 |
| Patient services expenses | $147 | $153 | $165 | $170 | $188 | $191 | $201 | $211 |
| Other expenses | $2.3 | $2.4 | $2.3 | $2.6 | $2.3 | $2.5 | $2.5 | $2.5 |
| Depreciation | $7.0 | $7.6 | $7.2 | $7.6 | $7.9 | $8.0 | $8.2 | $8.4 |
| EBIT | $6.99 | $12.03 | $7.95 | $12.93 | $11.69 | |||
| Interest | $4.7 | $7.8 | $5.5 | $8.7 | $8.4 | $9.5 | $10.4 | $11.2 |
| EBT | $2.28 | $4.25 | $2.47 | $4.21 | $3.28 | |||
| Net Taxes | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | |||
| Net Profits | $2.28 | $4.25 | $2.47 | $4.21 | $3.28 | |||
| General parameters | Acquirer | Target | General | |||||
| Cost of equity | 9% | 10% | ||||||
| Cost of debt | 7% | 8% | ||||||
| Proportion of debt | 40% | 30% | ||||||
| Tax rate | 0% | 0% | ||||||
| Market value of debt | $ 40 | |||||||
| Long-term growth rate | 1% | |||||||
| EBITDA multiple | 8 | |||||||
| Synergies | Magnitude | Timing | ||||||
| Supply cost reduction (1x) | -1.5% | In year 1, existing contracts may be used (at the beginning of year 1) - assume this applies to all patient services expenses | ||||||
| Improved charge capture (1x) | 1% | In year 2, new information systems and staff training must be implemented in year 1 before benefits occur beginning year 2. | ||||||
| Retentions | 2010 | 2011 | 2012 | |||||
| Acquired* | $ 18 | $ 8 | $ 8 | |||||
| Standalone | $ 8 | $ 8 | $ 8 | |||||
| *Will make a $10m investment in IT and staff training during the first year |
Net Patient Services Revenues
163.24799999999999 174.94032000000001 182.49912639999999 193.20406524800001 209.74039046784006Patient Services Expenses
146.92320000000001 152.89102564000001 165.04880030656 170.04507953114882 187.82251966395077Other Expenses
2.2999999999999998 2.4 2.2999999999999998 2.6 2.2999999999999998Depreciation
7.0359040000000004 7.6176127999999999 7.2 7.6243868313600007 7.9293623046144006Interest
4.7136800000000001 7.7850479999999997 5.4822441599999996 8.7244217184000004 8.411352324608 163.24799999999999 174.94032000000001 182.49912639999999 193.20406524800001 209.74039046784006 146.92320000000001 152.89102564000001 165.04880030656 170.04507953114882 187. 82251966395077 146.92320000000001 152.89102564000001 165.04880030656 170.04507953114882 187.82251966395077 191.31832300000002 201.06519350000002 210.81206399999999Inputs_merger
| Model Inputs | ||||||||
| General parameters | Model outputs | |||||||
| Cost of equity | 9% | Free operating cash flow value = | $ 237 | |||||
| Cost of debt | 7% | Market multiple value* = | $ 195 | |||||
| Proportion of debt | 40% | * To be addressed later | ||||||
| Tax rate | 0% | |||||||
| Market value of debt | $ 40 | |||||||
| Long-term growth rate | 1% | |||||||
| EBITDA multiple | 8 | |||||||
| Projected Cash Flow Statements and Retention Estimates (in millions of dollars) | ||||||||
| 2010 | 2011 | 2012 | ||||||
| Net revenues | $ 218 | $ 232 | $ 243 | |||||
| Patient services expenses | $ 191 | $ 201 | $ 211 | |||||
| Other expenses | $ 2.5 | $ 2.5 | $ 2.5 | |||||
| Depreciation | $ 8.0 | $ 8.2 | $ 8.4 | |||||
| EBIT | $ 16.3 | $ 19.8 | $ 21.1 | |||||
| Interest | $ 9.5 | $ 10.4 | $ 11.2 | |||||
| Earnings before taxes (EBT) | $ 6.8 | $ 9.4 | $ 9.9 | |||||
| Taxes | $ - 0 | $ - 0 | $ - 0 | |||||
| Net profit | $ 6.8 | $ 9.4 | $ 9.9 | |||||
| Estimated retentions | $ 18.0 | $ 8.0 | $ 8.0 | |||||
FOCF_merger
| 2010 | 2011 | 2012 | |||
| EBIT x (1 - T) | $ 16.3 | $ 19.8 | $ 21.1 | ||
| Plus depreciation | 8.0 | 8.2 | 8.4 | ||
| Less retentions | 18.0 | 8.0 | 8.0 | ||
| Terminal value | 300.8 | ||||
| Free operating cash flow | $ 6.3 | $ 20.0 | $ 322.2 | ||
| Corporate cost of capital = | 8.2% | ||||
| PV of target company | $ 277.27 | ||||
| Market value of debt | $ 40 | ||||
| Total equity value | $ 237.3 | ||||
No-merger worksheet
| Historical cash flow statement | Ad hoc forecasts, based on trend line graphs (below), incorporating synergies | |||||||
| Items | 2005 | 2006 | 2007 | 2008 | 2009 | 6 | 7 | 8 |
| Net patient revenues | $163 | $175 | $182 | $193 | $210 | $218 | $229 | $240 |
| Patient services expenses | $147 | $153 | $165 | $170 | $188 | $194 | $204 | $214 |
| Other expenses | $2.3 | $2.4 | $2.3 | $2.6 | $2.3 | $2.5 | $2.5 | $2.5 |
| Depreciation | $7.0 | $7.6 | $7.2 | $7.6 | $7.9 | $8.0 | $8.2 | $8.4 |
| EBIT | $6.99 | $12.03 | $7.95 | $12.93 | $11.69 | |||
| Interest | $4.7 | $7.8 | $5.5 | $8.7 | $8.4 | $9.5 | $10.4 | $11.2 |
| EBT | $2.28 | $4.25 | $2.47 | $4.21 | $3.28 | |||
| Net Taxes | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | |||
| Net Profits | $2.28 | $4.25 | $2.47 | $4.21 | $3.28 | |||
| General parameters | Acquirer | Target | General | |||||
| Cost of equity | 9% | 10% | ||||||
| Cost of debt | 7% | 8% | ||||||
| Proportion of debt | 40% | 30% | ||||||
| Tax rate | 0% | 0% | ||||||
| Market value of debt | $ 40 | |||||||
| Long-term growth rate | 1% | |||||||
| EBITDA multiple | 8 | |||||||
| Synergies | Magnitude | Timing | ||||||
| Supply cost reduction (1x) | -1.5% | In year 1, existing contracts may be used (at the beginning of year 1) - assume this applies to all patient services expenses | ||||||
| Improved charge capture (1x) | 1% | In year 2, new information systems and staff training must be implemented in year 1 before benefits occur beginning year 2. | ||||||
| Retentions | 2010 | 2011 | 2012 | |||||
| Acquired* | $ 18 | $ 8 | $ 8 | |||||
| Standalone | $ 8 | $ 8 | $ 8 | |||||
| *Will make a $10m investment in IT and staff training during the first year |
Net Patient Services Revenues
163.24799999999999 174.94032000000001 182.49912639999999 193.20406524800001 209.74039046784006Patient Services Expenses
146.92320000000001 152.89102564000001 165.04880030656 170.04507953114882 187.82251966395077Other Expenses
2.2999999999999998 2.4 2.2999999999999998 2.6 2.2999999999999998Depreciation
7.0359040000000004 7.6176127999999999 7.2 7.6243868313600007 7.9293623046144006Interest
4.7136800000000001 7.7850479999999997 5.4822441599999996 8.7244217184000004 8.411352324608Input_no-merger
| Model parameters | Model outputs | |||||||
| Cost of equity | 10% | Free operating cash flow value = | $ 141.9 | |||||
| Cost of debt | 8% | Market multiple value* = | $ 171.3 | |||||
| Proportion of debt | 30% | * To be addressed later | ||||||
| Tax rate | 0% | |||||||
| Market value of debt | $ 40 | |||||||
| Long-term growth rate | 1% | |||||||
| EBITDA multiple | 8 | |||||||
| Projected Cash Flow Statements and Retention Estimates (in millions of dollars) | ||||||||
| 2010 | 2011 | 2012 | ||||||
| Net revenues | $ 218 | $ 229 | $ 240 | |||||
| Patient services expenses | $ 194 | $ 204 | $ 214 | |||||
| Other expenses | $ 2.5 | $ 2.5 | $ 2.5 | |||||
| Depreciation | $ 8.0 | $ 8.2 | $ 8.4 | |||||
| EBIT | $ 13.4 | $ 14.4 | $ 15.4 | |||||
| Interest | $ 9.5 | $ 10.4 | $ 11.2 | |||||
| Earnings before taxes (EBT) | $ 3.9 | $ 4.1 | $ 4.3 | |||||
| Taxes | $ - 0 | $ - 0 | $ - 0 | |||||
| Net profit | $ 3.9 | $ 4.1 | $ 4.3 | |||||
| Estimated retentions | $ 8.0 | $ 8.0 | $ 8.0 | |||||
FOCF_no-merger
| 2010 | 2011 | 2012 | |||
| EBIT x (1 - T) | $ 13.4 | $ 14.4 | $ 15.4 | ||
| Plus depreciation | 8.0 | 8.2 | 8.4 | ||
| Less retentions | 8.0 | 8.0 | 8.0 | ||
| Terminal value | 190.3 | ||||
| Free operating cash flow | $ 13.4 | $ 14.6 | $ 206.1 | ||
| Corporate cost of capital = | 9.4% | ||||
| PV of target company | $ 181.90 | ||||
| Market value of debt | $ 40 | ||||
| Total equity value | $ 141.9 | ||||
