Perform a DCF valuation of MW as of 2016 using the template given. Assume 500,000 in equity and a 5% cost of debt if the balance
1. Perform a DCF valuation of MW as of 2016 using the template given. Assume 500,000 in equity and a 5% cost of debt if the balance of deal is financed with debt. Assume a 9%WACC. Finally, assume that TV is 10.5 times year7 EBIT.
2. How much tax is avoided by using the level of debt financing in the deal?
3. What would be your valuation if operating margin remains at 57.4% throughout the forecast period?
4. What would you offer for the practice?
Place all answers in excel spread sheet attached.
Ex 1_Historical
| Exhibit 1 | |||
| Hospital Pediatrics | |||
| Finanial Statements for Mary Washington Pediatrics | |||
| (in thousands of US dollars) | |||
| 2015 | 2016 | ||
| Net revenue | 1,547 | 1,555 | |
| Operating expenses* | 882 | 893 | |
| Physician salary | 468 | 496 | |
| Depreciation | 13 | 10 | |
| Operating profit | 184 | 155 | |
| Taxes | 59 | 50 | |
| Net profit | 125 | 105 | |
| Cash | 89 | 106 | |
| Accounts receivable | 244 | 286 | |
| Medical supplies | 31 | 43 | |
| Other current assets | 17 | 24 | |
| Total current assets | 381 | 459 | |
| Gross equipment | 733 | 733 | |
| Accumulated depreciation | 397 | 407 | |
| Net equipment | 337 | 326 | |
| Total assets | 718 | 785 | |
| Accounts payable | 31 | 32 | |
| Wages payable | 126 | 96 | |
| Other payables | 24 | 15 | |
| Total current liabilities | 181 | 143 | |
| Owners’ equity | 537 | 642 | |
| * Operating expenses included office salary, medical expenses, office supplies and expenses, rent and other building expenses, and insurance costs. | |||
| Source: Created by author. |
Ex 2_Ratios
| Exhibit 2 | ||||
| Hospital Pediatrics | ||||
| Financial Ratios for Select Pediatric Practices | ||||
| (financial figures in thousands of US dollars) | ||||
| Mary Washington Pediatrics | Green Hills Pediatrics | Harpeth Group | ||
| Net revenue | 1,555 | 2,535 | 3,296 | |
| Operating profit | 155 | 276 | 399 | |
| Net profit | 105 | 183 | 264 | |
| Accounts receivable | 286 | 361 | 497 | |
| Total current assets | 459 | 552 | 830 | |
| Net equipment | 326 | 634 | 646 | |
| Total assets | 785 | 1,186 | 1,476 | |
| Total current liabilities | 143 | 178 | 296 | |
| Operating margin | 10.0% | 10.9% | 12.1% | |
| Net profit margin | 6.8% | 7.2% | 8.0% | |
| Total asset turnover | 2.0 | 2.1 | 2.2 | |
| Accounts receivable days | 67 | 52 | 55 | |
| Working capital turnover | 4.9 | 6.8 | 6.2 | |
| Net equipment turnover | 4.8 | 4.0 | 5.1 | |
| Return on assets | 13.4% | 15.4% | 17.9% | |
| Source: Created by author. |
Question 1
| Exhibit 3 | |||||||||||
| Hopsital Pediatrics | |||||||||||
| Atwood’s Financial Forecast for Mary Washington Pediatrics | |||||||||||
| (financial figures in thousands of US dollars) | |||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||
| Revenue growth | 0.5% | 3.0% | 5.0% | 5.0% | 5.0% | 3.0% | 3.0% | 2.0% | |||
| Operating expenses/ revenue | 57.4% | 57.4% | 57.0% | 56.5% | 56.0% | 54.0% | 53.0% | 53.0% | |||
| Net working capital | 315.9 | 272.1 | 214.2 | 176.5 | 181.9 | 185.5 | 189.2 | 193.0 | |||
| Net equipment | 326.3 | 375.1 | 415.1 | 455.1 | 475.1 | 498.2 | 484.2 | 464.6 | |||
| Depreciation | 10.4 | 14.0 | 20.0 | 28.0 | 37.0 | 42.0 | 42.9 | 42.9 | |||
| Capital expenditures | 4.1 | 62.8 | 60.0 | 68.0 | 57.0 | 65.1 | 28.9 | 23.3 | |||
| Net revenue | 1,602 | 1,682 | 1,766 | 1,854 | 1,910 | 1,967 | 2,007 | ||||
| Operating expenses | 920 | 959 | 998 | 1,038 | 1,031 | 1,043 | 1,064 | ||||
| Depreciation | 14 | 20 | 28 | 37 | 42 | 43 | 43 | ||||
| Physician salary | 500 | 525 | 551 | 579 | 596 | 614 | 626 | ||||
| Operating profit | 168 | 178 | 189 | 200 | 240 | 268 | 274 | ||||
| Valuation Assumptions | |||||||||||
| Discount Rate | 9% | ||||||||||
| Tax Rate | 32% | ||||||||||
| FCF Valuation | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||
| (1-t)*(EBIT) | 211.755 | ||||||||||
| Add Depreciation | |||||||||||
| 281.4 | |||||||||||
| Sub Chng NWC | |||||||||||
| Sub CAPX | |||||||||||
| FCF | |||||||||||
| TV (10.5*EBIT) | |||||||||||
| PV of Forecast | |||||||||||
| PV of TV | |||||||||||
| EV |
Question 2
| 2. Taxes Avoided from Debt Financing (000's) | |||
| Comment | 2016 Value | ||
| Enterprise Value (prior page) | Prior Page | ||
| Equity Invested | Assumed | ||
| Debt Financing | Difference: EV – Equity | ||
| Reported Profit – No Debt | Prior Page | ||
| Taxes – No Debt | 32% | ||
| Reported Profits – With Debt | Profits – Interest | ||
| Taxes with Debt | 32% | ||
| Taxes Avoided | Taxes (ND) – Taxes (D) |
Question 3
| Exhibit 3 | |||||||||
| Hospital Pediatrics | |||||||||
| Atwood’s Financial Forecast for Mary Washington Pediatrics | |||||||||
| (financial figures in thousands of US dollars) | |||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Revenue growth | 0.5% | 3.0% | 5.0% | 5.0% | 5.0% | 3.0% | 3.0% | 2.0% | |
| Operating expenses/ revenue | 57.4% | 57.4% | |||||||
| Net working capital | 315.9 | 272.1 | 214.2 | 176.5 | 181.9 | 185.5 | 189.2 | 193.0 | |
| Net equipment | 326.3 | 375.1 | 415.1 | 455.1 | 475.1 | 498.2 | 484.2 | 464.6 | |
| Depreciation | 10.4 | 14.0 | 20.0 | 28.0 | 37.0 | 42.0 | 42.9 | 42.9 | |
| Capital expenditures | 4.1 | 62.8 | 60.0 | 68.0 | 57.0 | 65.1 | 28.9 | 23.3 | |
| Net revenue | 1,602 | 1,682 | 1,766 | 1,854 | 1,910 | 1,967 | 2,007 | ||
| Operating expenses | 920 | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Depreciation | 14 | 20 | 28 | 37 | 42 | 43 | 43 | ||
| Physician salary | 500 | 525 | 551 | 579 | 596 | 614 | 626 | ||
| Operating profit | 168 | 1,137 | 1,187 | 1,239 | 1,272 | 1,310 | 1,337 | ||
| Valuation Assumptions | |||||||||
| Discount Rate | 9% | ||||||||
| Tax Rate | 32% | ||||||||
| FCF Valuation | 2016 | 2017.0 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| (1-t)*(EBIT) | |||||||||
| Add Depreciation | |||||||||
| Sub Chng NWC | |||||||||
| Sub CAPX | |||||||||
| FCF | |||||||||
| TV (10.5*EBIT) | |||||||||
| PV of Forecast | $0.00 | ||||||||
| PV of TV | 0 | ||||||||
| EV | $0.00 |
Question 4
| Opening Bid | |
| Justification |
,
Questions:
1. Perform a DCF valuation of MW as of 2016 using the template given. Assume 500,000 in equity and a 5% cost of debt if the balance of deal is financed with debt. Assume a 9%WACC. Finally, assume that TV is 10.5 times year7 EBIT.
2. How much tax is avoided by using the level of debt financing in the deal?
3. What would be your valuation if operating margin remains at 57.4% throughout the forecast period?
4. What would you offer for the practice?
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