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

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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 $ 1,000,000 last year
for the dentist, after meeting all office expenses. The income is
expected to grow at 2.5% in perpetuity, with no reinvestment
needed. The tax rate is 22%.
• 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 $35,000 annually. As an
alternative to private practice, the dentist could work at a dental
hospital nearby at an annual salary of $ 175,000. (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
$120,000 a year.
• The unlevered beta for a company of this size, industry,
risks, and geography is 1.90. The dental practice has no debt. (You
can use a riskfree rate of 3.00% and a risk premium of 6.50%).
a. Estimate the cost of capital that you would use in valuing
this practice.
b. Estimate the value of the practice for sale in a
private transaction to another dentist who is not diversified.