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Model CASE 31 BEACHSIDE HEALTH PARTNERS: Joint Venture Analysis 12/1/17 Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale. Model with Questions, Student Version...

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Model
    CASE 31 BEACHSIDE HEALTH PARTNERS: Joint Venture Analysis                        12/1/17
    Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale.
        Model with Questions, Student Version
    This case considers the financial analysis of a joint venture involving both taxable and nontaxable
    general partners as well as taxable limited partners. The model generates the partnership's
    forecasted cash flow statements, distributions, and each participant's profitability. Note that the
    model extends out to Column G. Also note that the analysis focuses on cash flows to the two
    classes of equityholders.
    The model consists of a complete base case analysis--no changes need to be made to the existing
    MODEL-GENERATED DATA section. However, values in the INPUT DATA section of the student
    spreadsheet have been replaced by zeros. Students must select appropriate input values and ente
    them into the cells with values colored red. After this is done, any e
or cells will be co
ected and
    the base case solution will appear. The KEY OUTPUT section includes the most important output
    from the MODEL-GENERATED DATA section.
    INPUT DATA:             KEY OUTPUT:
    Capital Contributions:                     XXXXXXXXXXIRR
     Group        $0     XXXXXXXXXXHospital        ERROR:#VALUE!
     Hospital        0     XXXXXXXXXXGroup        ERROR:#VALUE!
     Limited partners        0     XXXXXXXXXXLimited partners        ERROR:#NUM!
     Bank loan        0
            $0             XXXXXXXXXXNPV
    Capital Costs:             XXXXXXXXXXHospital        ERROR:#DIV/0!
                 XXXXXXXXXXGroup        ERROR:#DIV/0!
     General partners cost of equity        0.0%     XXXXXXXXXXLimited partners:
     Limited partners cost of equity        0.0%     XXXXXXXXXXTotal        $0
     Bank loan rate        0.0%     XXXXXXXXXXPer partner        ERROR:#DIV/0!
    Utilization Data:
     Weeks usage per year        0
     Procedures per week:
     Year 1        0.0
     Year 2        0.0
     Year 3        0.0
     Year 4        0.0
     Year 5        0.0
    Operating Revenue and Cost Data:
     Net revenue per procedure        $0
     Net revenue inflation        0.0%
     Supplies per procedure        $0
     Supplies inflation        0.0%
     Technician cost per procedure        $0
     Clerical cost per procedure        $0
     Salary inflation        0.0%
     Rent inflation        0.0%
     Insurance inflation        0.0%
     Marketing inflation        0.0%
     Admin expense inflation        0.0%
     Group/LP eff tax rate        0.0%
    Cash Flow Distribution Data:
     Initial distribution to
     general partners        0.0%
     Final distribution to
     general partners        0.0%
    MODEL-GENERATED DATA:
    Loan Amortization Table:
                        Maximum    Maximum
            Interest    Principal    Principal    Hospital    Group
    Year    Payment    Payment    Payment    Remaining    Liability    Liability
    1    $0    $0    $0    $0    ERROR:#DIV/0!    ERROR:#DIV/0!
    2    0    0    0    0    ERROR:#DIV/0!    ERROR:#DIV/0!
    3    0    0    0    0    ERROR:#DIV/0!    ERROR:#DIV/0!
    4    0    0    0    0    ERROR:#DIV/0!    ERROR:#DIV/0!
    5    0    0    0    0    ERROR:#DIV/0!    ERROR:#DIV/0!
    Cash Flow Statements:
            Year 1    Year 2    Year 3    Year 4    Year 5
    Net revenues        $0    $0    $0    $0    $0
    Cash operating costs:
     Technician support        $0    $0    $0    $0    $0
     Clerical support        0    0    0    0    0
     Rent        15,000    15,000    15,000    15,000    15,000
     Insurance        10,000    10,000    10,000    10,000    10,000
     Marketing expenses        5,000    5,000    5,000    5,000    5,000
     Expendable supplies        0    0    0    0    0
     Service contract        50,000    50,000    75,000    75,000    100,000
     Property taxes        23,000    24,000    25,000    26,000    27,000
     Administrative expense        30,000    30,000    30,000    30,000    30,000
     Principal repayment        0    0    0    0    0
     Interest expense        0    0    0    0    0
     Miscellaneous expenses        20,000    20,000    20,000    20,000    20,000
     Total expenses        $153,000    $154,000    $180,000    $181,000    $207,000
    Partnership net CF        ($153,000)    ($154,000)    ($180,000)    ($181,000)    ($207,000)
    Cash Flow Distributions:
            Year 1    Year 2    Year 3    Year 4    Year 5
    General partners        ($153,000)    ($154,000)    ($180,000)    ($181,000)    ($207,000)
     Group        ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!
     Hospital        ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!
    Limited partners        $0    $0    $0    $0    $0
    Total distribution        ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!
    After-Tax Profitability Analysis:
        Year 0    Year 1    Year 2    Year 3    Year 4    Year 5
    Group    $0    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!
    Hospital    0    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!    ERROR:#DIV/0!
    Limited partners    0    0    0    0    0    0
            IRR    NPV
    Hospital        ERROR:#VALUE!    ERROR:#DIV/0!
    Group        ERROR:#VALUE!    ERROR:#DIV/0!
    Limited partners        ERROR:#NUM!    0
                            END
STANDARD DEVIATION CALCULATOR
    STANDARD DEVIATION CALCULATOR
    INPUT DATA:
     XXXXXXXXXXNPV         Probability
    $0        0.0%
    $0        0.0%
    $0        0.0%
    $0        0.0%
    $0        0.0%
    $0        0.0%
            100.0%
    KEY OUTPUT:
     XXXXXXXXXXE(NPV) =            $0
     XXXXXXXXXXVariance =            0
     XXXXXXXXXXStandard Deviation =            $0
     XXXXXXXXXXCoefficient of Variation =            ERROR:#DIV/0!
                END
Q1
Question 1
Consider the Partnership's cash flow statements.
a. Why are the debt repayments (principal and interest) included in the cash flows here but not shown in a conventional capital budgeting analysis?
. Which cash flow elements are known with relative certainty? Which ones are the most uncertain? Explain.
Q2
Question 2
Develop the Partnership's annual cash flow distributions to each partner. (Treat the limited partners as a single entity.) Apply the tax status of each partner to obtain each partner's annual after-tax cash flows.
Q3
Question 3
Find the IRR on each partner's investment.
Q4
Question 4
a. Qualitatively discuss the relative riskiness of the cash flow streams to (1) the bank, (2) the general partners, and (3) the limited partners.
. Quantitatively assess the risks facing the group, the hospital, and the limited partners. (Hint: Because of the unusual methodology for distributing the cash flows, sensitivity analysis is not very useful, so a scenario analysis is probably most appropriate. Also, because of non-normal cash flows, the IRR is not very useful. Therefore, it might be best to use an a
itrary discount rate—say, 10 percent—and focus on NPV.)
Q5
Question 5
Using the data in the case, along with your best estimates for the risks facing the general and limited partners, assign capital (equity) cost rates to these parties.
Q6
Question 6
Are there potential benefits to any of the partners that are not reflected in the cash flow distributions? Explain. Should this be of concern to any of the other partners?
Q7
Question 7
Does the partnership raise any conflict of interest or ethical issues for any of the partners? Explain.
Q8
Question 8
Summarize the potential risk
eward positions of each party, including the bank. Should each party be willing to invest in the partnership?
Q9
Question 9
Discuss the effect of the following two factors on the decision to go forward with the joint venture.
a. The ability to abandon the venture should things go sour early on
. The fact that the cash flows are truncated after five years without any attempt to estimate a terminal value
Q10
Question 10
Considering all factors, should the joint venture be formed? If you believe that the joint venture should not be formed because of inequities in distribution percentages, suggest any changes to the partnership agreement that you believe to be necessary to induce participation. Also, in making your final recommendation, think very seriously about the difference between objective risk and subjective risk.
Q11
Question 11
In your opinion, what are three key learning points from this case?

BEACHSIDE HOSPITAL IS a 320-bed, acute care, not-for-profit hospital
located in Myrtle Beach, South Carolina. It is well known as a leader in
new technology and hence draws patients from as far away as Georgetown,
South Carolina, to the south and Wilmington, North Carolina, to the north.
Beachside contracts with the Grand Strand Radiology Group to provide
adiology services for its patients. Basically, Beachside furnishes the radiology
equipment and technicians and performs the tests, while the Grand Strand
physicians read the results. Because Grand Strand bills patients separately for
the readings, there is no direct payment from Beachside to Grand Strand.
At the end of a monthly medical staff meeting, Dr. George Brigham,
president of Grand Strand, presented a proposal to Mary Cohen, Beach-
side's CEO. Grand Strand wants to form a partnership with Beachside to
provide renal diagnostic and treatment services, primarily lithotripsy and
ureteroscopy:
Lithotripsy uses a lithotripter, equipment that sends high-energy
shock waves, guided by X-ray or ultrasound, to
eak up stones
in the kidney, bladder, or ureter (duct connecting the kidneys and
the bladder). During the procedure, patients lie on a water-filled
cushion placed on the examination table and are given general
anesthesia to keep them asleep and pain free. Shock or sound
waves shatter the stones into pieces small enough to pass out of
the body in urine. This procedure takes about 45 minutes to 1
hour (https:llmedlineplus.gov/ency/artic1e/007113.htm).
© Foundation of ACHE, 2018. Reproduction without permission is prohibited . 211
212 Gapenski's Cases in Healthcare Finance
• Ureteroscopy uses a ureteroscope, a long, thin device attached to
a tiny light and camera to inspect the ureter for abnormalities.
This tool also ca
ies tiny instruments that remove or
eak
up kidney stones or stents that aid in passing kidney stones
or urine. General anesthesia is administered to patients before
the procedure, which usually takes about an hour (https:11
medlineplus.gov/encylarticlel007593.htm).
In total, the capital cost of the lithotripter and ureteroscope is approximately
$1 million.
The idea of a partnership with Grand Strand, even ifit lasts for only two
years, appeals to Mary. First, by offering lithotripsy and ureteroscopy; Beachside
is reinforcing its position as the regional leader in renal health. Second, the
partnership would position Beachside as the leading provider in the competi-
tive Myrtle Beach market. Mary believes Beachside's board of trustees would
not be willing to bear the entire risk of the equipment purchase but might
e willing to go along with a joint venture. Thus, she asked Dr. Brigham to
look into the matter further and develop a specific joint venture proposal.
Mary had almost forgotten the matter when, two months later, Dr.
Brigham appeared with the following joint venture proposal (exhibit 31.1
contains a summary of the proposed financing):
1. A separate business entity; Beachside Health Partners (the
Partnership), would be formed.
2. The Partnership would have two general partners: Grand Strand
and Beachside. Grand Strand would put up $300,000 in capital
and retain 60 percent management control, whereas Beachside
would furnish $200,000 in capital and obtain 40 percent control.
(Grand Strand is incorporated, but it files federal income
taxes as an S corporation. It would incorporate a subsidiary S
corporation for the sole purpose of investing in the Partnership.
S corporations pay no federal income taxes. Rather, as in a
partnership, the income is constructively prorated among the
owners and taxed as ordinary income.)
3. Twenty-five limited partnerships would be offered to local
physicians for $20,000 each
Answered Same DayMar 03, 2022

Solution

Prince answered on Mar 04 2022
40 Votes
Model
    CASE 31 BEACHSIDE HEALTH PARTNERS: Joint Venture Analysis                        12/1/17
    Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale.
        Model with Questions, Student Version
    This case considers the financial analysis of a joint venture involving both taxable and nontaxable
    general partners as well as taxable limited partners. The model generates the partnership's
    forecasted cash flow statements, distributions, and each participant's profitability. Note that the
    model extends out to Column G. Also note that the analysis focuses on cash flows to the two
    classes of equityholders.
    The model consists of a complete base case analysis--no changes need to be made to the existing
    MODEL-GENERATED DATA section. However, values in the INPUT DATA section of the student
    spreadsheet have been replaced by zeros. Students must select appropriate input values and ente
    them into the cells with values colored red. After this is done, any e
or cells will be co
ected and
    the base case solution will appear. The KEY OUTPUT section includes the most important output
    from the MODEL-GENERATED DATA section.
    INPUT DATA:             KEY OUTPUT:
    Capital Contributions:                     IRR
     Group        $300,000     Hospital        22.8%
     Hospital        200,000     Group        11.5%
     Limited partners        500,000     Limited partners        48.8%
     Bank loan        1,000,000
            $2,000,000             NPV
    Capital Costs:             Hospital        $58,227
                 Group        $9,873
     General partners cost of equity        10.0%     Limited partners:
     Limited partners cost of equity        10.0%     Total        $390,485
     Bank loan rate        8.0%     Per partner        $15,619
    Utilization Data:
     Weeks usage per year        50
     Procedures per week:
     Year 1        4.0
     Year 2        5.0
     Year 3        4.0
     Year 4        3.0
     Year 5        2.0
    Operating Revenue and Cost Data:
     Net revenue per procedure        $5,000
     Net revenue inflation        0.0%
     Supplies per procedure        $25
     Supplies inflation        5.0%
     Technician cost per procedure        $100
     Clerical cost per procedure        $50
     Salary inflation        5.0%
     Rent inflation        5.0%
     Insurance inflation        5.0%
     Marketing inflation        5.0%
     Admin expense inflation        5.0%
     Group/LP eff tax rate        20.0%
    Cash Flow Distribution Data:
     Initial distribution to
     general partners        30.0%
     Final distribution to
     general partners        50.0%
    MODEL-GENERATED DATA:
    Loan Amortization...
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