Chris Miller has been given an opportunity to take over an established dental clinic. The benefits of taking over this clinic is that he already has loyal customers and that there is only three clinics in the city. Miller has some major decisions that he needs to think about before he takes over this practice. He needs to decide how he will finance this purchase and how will he get the bank to give him a loan? Before we can even decide if he should go ahead with the purchase, we need to analyze three different scenarios of what can happen to the practice. We also need to make sure that Miller would be able to repay the loans as we are analyzing the different scenarios. Scenario 1
Scenario 1 is according to Miller’s assumption. He believes that he would reduce the associate fee to 15% and that the sales growth would equal to half the increase in sales from fiscal year 2004 and 2005. With this in mind, I set g to equal 17.5% which is considered “high” because inflation is 3%, so g has to be greater than 0.08 + inflation. After that I decided to make the inflation 0.16 because of the rule of thumb that we discussed in the infamous notes.
At one point in this case, Miller was contradicting himself because he wants a high growth rate but does not want to purchase any new assets. I am assuming that he does not buy new assets and the company has a high growth rate. Which means that: C= (39,239-27,721)/(812,987-28,781)= 0.022
2006- 0.022*0.175*955,260= 3,663
2007- 0.022*0.175*1,122,430= 4,304
2008- 0.022*0.175*1,318,855= 5,057
2009- 0.022*0.060*1,549,655= 2,037
If Miller just uses this scenario to decide if he wants to purchase the practice, then he should. With a positive CATO from the cash flow forecast, Miller would be able to pay the loan in 2008. This type of outcome is to good to be true. It is not possible for him to make so much money as soon as he purchases the practice. He is living in a small town, not a big...