Compute the worth of Arcadia Hospital in 2005 using rules of thumb, adjusted book value, and discounted cash flow valuation (for this final method, use the table provided). Assume the cash flow for 2005 is the same as 2006. ($655 million)
1) Rules of thumb:
2) Adjusted book value:
3) Discounted cash flow:
Cash Flow amount
Capitalization Rate
6%
8%
10%
12%
Value
Part II: Compare your findings for each valuation method, and discuss any differences or similarities between the calculated values. What method do you think gives the most accurate picture of the worth of Arcadia in 2005? Explain your answer.
Subject: Financial Matters for Health Care Providers
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To do it on my own, but don't get it and i only have few hrs left to solve it....
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To calculate the worth of Arcadia Hospital in 2005 using different valuation methods, we will use rules of thumb, adjusted book value, and discounted cash flow valuation. Let's break down each method:
1) Rules of thumb: This method estimates the value based on industry benchmarks or commonly used multiples. However, without specific information about the industry or hospital, it is challenging to provide an accurate estimate.
2) Adjusted book value: This method determines the value by adjusting the accounting book value of the hospital's assets and liabilities. It considers factors such as the replacement cost of assets, depreciation, and outstanding debts. However, since we don't have the specific details of Arcadia Hospital's assets and liabilities, it is not possible to calculate the adjusted book value.
3) Discounted cash flow: This method estimates the intrinsic value of an investment by calculating the present value of expected future cash flows. In this case, we are given that the cash flow for 2005 is the same as 2006, which is $655 million.
To calculate the value using discounted cash flow, we need the capitalization rate, also known as the discount rate. The discount rate reflects the risk associated with the investment and is typically based on factors such as interest rates and the industry's average return.
From the table provided, we need to choose a capitalization rate. The capitalization rates given are 6%, 8%, 10%, and 12%. Let's try each rate and compute the value:
Discounted Cash Flow Value (6%): Value = Cash Flow / Discount Rate
Value = $655 million / 0.06 = $10,916.67 million
Discounted Cash Flow Value (8%): Value = Cash Flow / Discount Rate
Value = $655 million / 0.08 = $8,187.50 million
Discounted Cash Flow Value (10%): Value = Cash Flow / Discount Rate
Value = $655 million / 0.10 = $6,550 million
Discounted Cash Flow Value (12%): Value = Cash Flow / Discount Rate
Value = $655 million / 0.12 = $5,458.33 million
Comparing the calculated values from different valuation methods, we can see that the discounted cash flow method provides a range of values depending on the chosen capitalization rate. The lower the discount rate, the higher the calculated value. Therefore, the discounted cash flow valuation gives a more accurate picture of the worth of Arcadia Hospital in 2005 because it considers the expected cash flows and the risk associated with the investment. However, since we do not have additional information about the cash flows or the company's specific characteristics, it is challenging to determine the most accurate value.