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Appendix C Approaches to Valuation Part I: 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. 1) Rules of thumb: 2) Adjusted book value: 3) Discounted cash flow: Cash Flow amount Capitalization Rate Value 6% 8% 10% 12% 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. Arcadia Hospital Income Statement YTD Dec 31, 2005 (Dollars in Millions) Operating Revenues 2005 % of rev Budget Over/(Under) Patient revenues 500 550 less: Allowance for doubtful accounts 13 14 equals Net patient revenues 488 536 Other Income: Investments 75 60 Misc 5 0 Total Operating Revenue 568 100.00% 596 Operating expenses: Wages 200 35.24% 180 Taxes & Benefits 75 13.22% 70 Temporary/Contract Labor 5 0.88% 0 Medical/surgical supplies 25 4.41% 30 Other misc supplies 5 0.88% 5 Dues/subscriptions 3 0.53% 3 Transcription expense 10 1.76% 15 Leases & rentals 50 8.81% 45 Malpractice Insurance 75 13.22% 70 Other Insurance 30 5.29% 32 Professional Fees 20 3.52% 20 Utilities 15 2.64% 10 Maintenance & Repairs 15 2.64% 10 Depreciation/Amortization 7 1.23% 7 Interest Expense 1 0.18% 1 Total Operating Expenses 536 94.45% 498 Net Income 32 5.55% 98

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