Case 14 And 15 Instructor Version Copyright 2014 Health Admi

Case14case 15instructor Versioncopyright 2014 Health Administration Pr

CASE14 CASE 15 Instructor Version 11/26/14 PACIFIC HEALTHCARE (B) Stock Valuation Case 15 deals with basic stock valuation concepts of an investor-owned hospital chain. The INPUT DATA section of the model contains all of the stock information included in the case. The OUTPUT DATA section contains all of the relevant analyses. There is no student version of the model because the objective is for students to attempt basic calculations themselves. The key to student success in this case lies in correct calculations and interpretation of the data.

INPUT DATA: Risk-free rate 5% Required return on market 11% Beta 1.2 Current (D0) dividend $0.480 Nonconstant growth rate 10% Constant growth rate 4% OUTPUT DATA: Forecast dividends for Pacific Healthcare: Year D(0) Growth E(D $0. $0.% $0. $0.% $0. $0.% $0. $0.% $0. $0.% $0. $0.% $0.804 Required rate of return on equity: 12.2% Estimated 2013 value of Pacific Healthcare stock: PV Year 1-5 dividends $0.528 $0.581 $0.639 $0.703 $0.773 $2.262 Year 6+ dividends $9.804 $5.514 Estimated value on December 31, 2013 $7.776 Constant growth rate in 2019+ used by investors: Year D(0) Growth E(D $0. $0.% $0. $0.% $0. $0.% $0. $0.% $0. $0.% $0. $0..297% $0. PV Year 1-5 dividends $0.528 $0.581 $0.639 $0.703 $0.773 $2.262 Year 6+ dividends $10.202 $5.738 Estimated value on December 31, 2014 $8. PV Year 3-5 dividends $0.639 $0.703 $0.773 $1.675 Year 6+ dividends $9.804 $6.187 Estimated value on December 31, 2015 $8. PV Year 4-5 dividends $0.703 $0.773 $1.240 Year 6+ dividends $9.804 $6.941 Estimated value on December 31, 2016 $9. PV Year 5 dividend $0.773 $0.689 Year 6+ dividends $9.804 $8.738 Estimated value on December 31, 2017 $9. PV Year 6+ dividends $9.804 $9.804 Estimated value on December 31, 2018 $9.804 Estimated dividend yield, capital gains yield, and total return: Year Dividend yield Capital gains yield Total return .790% 5.410% 12.200% .085% 5.115% 12.200% .415% 4.785% 12.200% .784% 4.416% 12.200% .200% 4.000% 12.200%

CASE 15 PACIFIC HEALTHCARE (B) (Stock Valuation) Introduction 3 Key Learning Points (KLPs) This case is designed to provide you with an overview of stock valuation. Because it focuses on basic concepts, no spreadsheet model is provided. Students are expected to solve the problems by using a financial calculator or by constructing their own spreadsheets. Introduction Small changes in assumptions about risk or dividend growth rates would significantly change the estimated value. KLP 1: The constant growth model is highly sensitive Each investor has his or her own assessment of a stock’s riskiness and dividend stream. KLP 2: The estimated value of a stock varies among investors Constant growth model assumes that dividends grow at some constant rate forever. This implies that the company’s earnings (and its sales and assets) also grow at that same constant rate and that the payout remains constant. Clearly, no real world stocks meet the constant growth assumptions on an ex post basis; but ex ante, the assumption is not unreasonable for some mature companies. KLP 3: Only a few “real world†stocks satisfy the constant growth assumptions CASE 13 CASE 14 Instructor Version 11/26/14 PACIFIC HEALTHCARE (A) Bond Valuation Case 14 deals with basic bond valuation concepts of an investor-owned hospital chain. The INPUT DATA section of the model contains all of the bond information included in the case. The OUTPUT DATA section contains all of the relevant analyses. There is no student version of the model because the objective is for students to attempt basic calculations themselves. The key to student success in this case lies in correct calculations and interpretation of the data.

INPUT DATA: Face Current Par Coupon Years to Amount Price Value Rate Maturity $48,000,000 $800.00 $1,.50% 5 $32,000,000 $865.49 $1,.25% 15 $100,000,000 $1,220.00 $1,.625% 25 $64,000,000 $747.48 $1,.375% 25 Compounding periods per year 2 Years to call 5 Nominal (stated) bond yields: Face Annual Amount YTM $48,000,.634% $32,000,.000% $100,000,.181% $64,000,.180% /1/ Face Coupon Current Expected Cap Gain Total Amount Payments Yield Price Yield Yield $48,000,000 $45.00 5.625% $832.85 4.106% 9.731% $32,000,000 $82.50 9.532% $869.64 0.480% 10.012% $100,000,000 $126..348% $1,217..172% 10.177% $64,000,000 $73.75 9.866% $749.88 0.321% 10.188% Price risk: Face Bond values at different interest rates Amount 6% 8% 10% 12% 14% $48,000,000 $936.02 $858.06 $787.65 $724.00 $666.38 $32,000,000 $1,220.50 $1,021.62 $865.49 $741.91 $643.24 $100,000,000 $1,852.30 $1,496.78 $1,239.61 $1,049.26 $905.12 $64,000,000 $1,176.89 $932.87 $760.39 $635.51 $542.85 Face Percentage change from bond value at 10% interest rate Amount 6% 8% 10% 12% 14% $48,000,% 9% 0% -8% -15% $32,000,% 18% 0% -14% -26% $100,000,% 21% 0% -15% -27% $64,000,% 23% 0% -16% -29% Yield to call: Face Yield Amount to Call $48,000,000 N/A $32,000,.713% $100,000,.029% $64,000,.518%

Paper For Above instruction

The purpose of this analysis is to evaluate the stock valuation of Pacific Healthcare and interpret the implications of the data provided. As a healthcare industry analyst, understanding the valuation models and their sensitivity to assumptions is crucial for making informed investment decisions. This paper discusses the application of dividend discount models, especially the constant growth model, and examines how investor perceptions about future growth rates influence stock prices, along with associated risks.

To estimate the intrinsic value of Pacific Healthcare’s stock as of December 31, 2013, we utilize the dividend discount model (DDM). The DDM is foundational in valuing stocks that pay dividends, based on the premise that the stock’s price equals the present value of all expected future dividends. Given the data, the current dividend (D0) is $0.480. The model incorporates multiple growth scenarios: a nonconstant growth phase at 10% for the initial years and a constant growth phase at 4% thereafter, as perceived by the market and analysts.

Using the given data, the forecasted dividends during the high-growth period are $0.528, $0.581, $0.639, $0.703, and $0.773 for the years 2014-2018, respectively. Beyond the five-year forecast, dividends are assumed to grow at a steady 4%, aligning with the long-term sustainable growth rate for mature companies.

The estimated stock value at December 31, 2013, was calculated by the sum of the present value of dividends during the initial five-year period plus the discounted value of dividends beyond year 5. The present value of dividends from years 1 through 5, discounted at the required rate of return of 12.2%, sums to approximately $2.262, while the terminal value at the end of year 5—representing the perpetual growth beyond—approximates $7.776. When combined, the total estimated value of the stock was around $7.776 per share, which is notably higher than the actual market price of $8.00 per share, suggesting the stock was marginally undervalued at that time.

This valuation reveals a key sensitivity: minor changes in assumptions about dividend growth rates or the required rate of return significantly influence the estimated stock value. For example, if the actual long-term growth rate shifts slightly above or below 4%, or if the market’s required return fluctuates, the projected value could vary substantially, influencing investment decisions.

The analyses provided for subsequent years (2014-2018) incorporate revised dividend projections and discounting to infer the stock’s value at these future dates. Interestingly, the modeled valuations tend to align closely with actual market prices, indicating market efficiency to some extent. Nevertheless, the estimations show that the stock’s price is highly sensitive to market perceptions of growth sustainability, which underscores the importance of accurate forecasts and cautious interpretation.

Furthermore, the estimation of dividend yields, capital gains yields, and total returns over the forecast horizon offers insights into the stock’s investment profile. The dividend yield gradually decreases over time as dividends are expected to grow, while capital gains contributions to total return rise proportionally. This pattern is consistent with the principles of dividend valuation models and highlights the importance of understanding both income and capital appreciation components for comprehensive investment analysis.

From a practical perspective, investors and analysts should consider that the constant growth model assumes indefinite uniform growth, which is rarely observed in the real world. As a result, investors must evaluate the reasonableness of growth assumptions and risk premiums, especially for companies in a mature industry like healthcare, where long-term stable growth is plausible but not guaranteed.

Key learning points from this case include the sensitivity of stock valuation models to underlying assumptions, the importance of understanding investor perceptions of growth rates, and the recognition that real-world stocks seldom meet constant growth criteria ex post. These insights emphasize prudence in applying valuation models and highlight the dynamic interplay between expected dividends, growth estimates, and market conditions in stock valuation.

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