Part I:
1) Rules of thumb:
The first approach to valuation is using rules of thumb. This method involves using general guidelines or industry standards to estimate the value of a company. In this case, we need to find a relevant rule of thumb that can be applied to valuing hospitals.
To compute the worth of Arcadia Hospital in 2005 using rules of thumb, you would look for a common ratio or multiplier used to estimate the value of hospitals. For example, you may find a rule of thumb that states the value of a hospital is typically a certain multiple of its revenue or earnings. Once you find a suitable rule, you would apply it to the appropriate financial metric of Arcadia Hospital in 2005 (such as revenue or earnings) to calculate its estimated worth.
2) Adjusted book value:
The second approach to valuation is using the adjusted book value method. This method involves adjusting the book value (the value of a company's assets minus its liabilities) to reflect the fair market value of those assets.
To compute the worth of Arcadia Hospital in 2005 using the adjusted book value method, you would start with the book value of the hospital's assets and then make adjustments based on factors such as the market value of similar assets, depreciation, and other relevant factors. This adjusted book value would then represent a more realistic estimate of the hospital's worth.
3) Discounted cash flow (DCF) valuation:
The third approach to valuation is using the discounted cash flow method. This method takes into account the future cash flow generated by the company and discounts it back to its present value. This is done to reflect the time value of money and the risk associated with the future cash flow.
To compute the worth of Arcadia Hospital in 2005 using the discounted cash flow method, you would need to estimate the future cash flow of the hospital, determine an appropriate discount rate (also known as the capitalization rate), and calculate the present value of those cash flows. The discount rate represents the required rate of return investors would expect for investing in Arcadia Hospital based on its risk profile.
For this method, you're given a table of different capitalization rates (discount rates) ranging from 6% to 12%. You would use these rates to calculate the present value of Arcadia Hospital's cash flows for 2005, assuming the cash flow for 2005 is the same as in 2006.
Part II:
To compare the findings for each valuation method and discuss the differences or similarities between the calculated values, you would examine the results obtained for each method.
For the rules of thumb method, you would have a specific ratio or multiple to apply to the financial metric of Arcadia Hospital, which would result in a valuation estimate.
For the adjusted book value method, you would have to adjust the book value of the hospital's assets based on various factors, potentially resulting in a different valuation estimate compared to the rules of thumb method.
For the discounted cash flow method, you would calculate the present value of Arcadia Hospital's cash flows using different capitalization rates. The resulting values would depend on the discount rate used, with higher rates leading to lower valuations and lower rates leading to higher valuations.
Deciding on the most accurate method for determining the worth of Arcadia Hospital in 2005 would require an evaluation of the strengths and weaknesses of each method, as well as considering the specific characteristics and circumstances of the hospital. Each method has its advantages and limitations, and the most accurate method would depend on several factors such as the availability of reliable data, industry-specific considerations, and the rate of return expected by investors.
In conclusion, the most accurate method for determining the worth of Arcadia Hospital in 2005 cannot be definitively stated without further analysis and considering the context-specific factors.