You have been called in to value a dental practice by an old friend and have been provided with the following information:

The practice generated pre-tax income of $ 550,000 last year for the dentist, after meeting all office expenses. The income is expected to grow at 2% in perpetuity, with no reinvestment needed. The tax rate is 40%.

The dentist currently spends about 20 hours a week doing the accounting and administrative work. You estimate that hiring an external accounting service will cost you $25,000 annually. As an alternative to private practice, the dentist could work at a dental hospital nearby at an annual salary of $ 150,000. (Neither was considered when estimating the income above.)

The office is run out of a building owned by the dentist. While no charge was assessed for the building in computing the income, you estimate that renting the space would have cost you $75,000 a year.

The unlevered beta of publicly traded medical service companies is 0.80 but only 1/3 of the risk in these companies is market risk. The dental practice has no debt. (You can use a riskfree rate of 4.25% and a risk premium of 4%.) Estimate the value of the practice for sale in a private transaction to another dentist who is not diversified.

After cleaning up the financial statement, the adjusted EBIT(1-T) from last year that you will use for estimating future FCFs is:

a. 360,000

b. 240,000

c. 225,000

d. 180,000