Case Study of Hca

Case Study

Hospital Corporation of America

Session 10 – Case Study HCA

1) Overall strategy

The total amount of money that HCA should raise is $450 million and this should be done through the debt option. This debt should be financed at the very beginning of 1982 to quickly enable HCA to use the fund for future expansion.

Some of the advantages from raising fund through this strategy are:

- It will enable to company to continue to grow at an annual rate of more than 20%

- Although the D/V will get higher, it would still be reasonable

- It should have a positive impact on EPS and stock price (stock will not be diluted)

- Interest on debt can be deducted on HCA tax return

- Losing A rating would not be damaging as HCA is the leader in hospital management field

Stock option could have a negative impact on stock price and EPS. It would dilute current shareholders since 15.6 million new shares would be needed to raise $500 million (current NOSH is 49.880 million shares so around 31% new shares would be needed).

2) Amount of fund needed

In order to calculate for the amount of fund needed to be raised, we would use the following assumptions:

- Revenue will grow at rate of 25%

Given that HCA raise more money through this debt financing, the company can use this fund to grow even further than current expected expansion rate at 20%. So, we assume the fund will let HCA grow higher at 25%

- Keeps Interest expense rate constant

Interest expense is kept at 6.37% of revenue as same as in 1981. Even though the company will have higher debt and higher interest, it would grow in accordance to the increase in revenue. As a result, the portion of interest to revenue can be assumed to remain the same.

- Capital expenditure

The capital expenditure during the year is planned to be $575 million according to what stated in the case.

Methodology:

1) Income statement forecast with the assumed 25% growth rate

2) Balance Sheet forecast with LT Debt plugged in as a last number to calculated

3) Funds needed: $450m

3) Capital structure

As mentioned earlier, we will pursue the additional funding with all debt financing. So, the capital structure of HCA will be change according to below table

The D/TC ratio will be around 70% which is higher than the target rate (60%). However, this could still be reasonable for HCA. The company can consider this as Long-term investment to use the money for acquiring hospitals and expanding the business. Although it might not sound compelling at this point compared to the strategy that other hospital like Humana use, this investment will benefit HCA more in the future because of the limited numbers of hospitals in the market.

4) EPS and Stock price

We assume P/E ratio stays constant

5) Capital will be raised on