Use the discounted cash flow dcf methodology

MADISON CLINICS

PRACTICE VALUATION

The most recent income statement of the business, modified to focus on free cash flow to equity holders, is contained in Table 24.2. Free cash flow to equity holders, as typically defined in a business valuation context, is net income plus noncash expenses (depreciation) less capital investment requirements to replace worn-out and obsolete equipment and support future growth. Note that the statement is based on an assumed effective average tax rate of 20 percent, which is the rate applicable if the Practice were to file as a C corporation. However, the tax rate that must be applied in any valuation analysis would be the marginal tax rate of the acquirer. Also, note that the Practice currently uses no debt financing, so none is shown on the cash flow statement in Table 24.2.

Of course, the value of the Practice is not a function of past cash flows but of future cash flows. Heidi Wilde, the administrator of Madison Clinics, was given the task of estimating the business’s future cash flows. The first thing she did was to estimate the expected revenue growth rates for the next five years; these estimates are contained in Table 24.3. Because uncertainty is significant in future volume estimates, and hence in revenue growth rates, three scenarios are presented. Although Heidi wanted to attach differential probabilities to the three scenarios, her best guess is that one scenario is that one scenario is as likely as another one. Regardless of the near-term revenue growth scenario, the Practice’s long-term, sustainable growth rate is expected to be 5 percent.

1. Does the valuation depend on who would make the acquisition? For example, would a not-for-profit hospital place a different value on the Practice than would another for-profit group practice? If so, what factors drive this differential?

2. If the valuation methods do not result in consistent values for any acquirer, explain (a) why the differences exist and (b) which method is the most believable.

Average Number of Visits by Day:

Downtown Midtown

Friday 33 28

Saturday - 37

Cash/Credit card 25.7 35.7

Blue Shield 20.9 24.4

Net revenues $1,491,791

Operating expenses 1,069,076

Less capital requirements 15,000

Net cash flow $ 334,242

Worst 7.0 6.0 5.0 5.0 5.0

This case analysis should be approximately one page in length.