Question
e. HCA is the largest private operator of health care facilities in the world with hundrd of facilities in over 20 states. In 2006, private equity buyers took the company private in a $31.6 billion acquisition. In broad terms how costly do you think financial distress would be to HCA if it began to appear the company might be having difficulty servicing its debt? Why?
f. In late 2010 HCA announced an intended dividend recapitalization in which it would pay a $2 billion dividend to shareholders financed in large part by a $1.53 billion bond offering. At an interest rate of 6 percent, how would the added debt have affected HCA's times-interest-earned ratio in 2009?
g. Please comment on HCA's capital structure. Is its 2009 debt level prudent? Is it smart to add another $1.53 billion to this total? Why, or why not?
HCA INC ANNUAL INCOME STATEMENT ($ MILLIONS, EXCEPT PER SHARE) Dec09 Dec08 Dec07 Dec06 Dec05 Sales $ 30,052 $ 28,374 $ 26,858 $ 25,477 $ 24,455 Cost of Goods Sold 24,826 24,023 22,480 21,448 20,391 Gross Profit 5,226 4,351 4,378 4,029 4,064 Depreciation 1,425 1,416 1,426 1,391 1,374 Operating Profit 3,801 2,935 2,952 2,638 2,690 Interest Expense 1,987 2,021 2,215 955 655 Non-Operating Income/Expense 188 256 661 179 412 Pretax Income 2,002 1,170 1,398 1,862 2,327 Total Income Taxes 627 268 316 625 725 Minority Interest 321 229 208 201 178 Net Income $ 1,054 $ 673 $ 874 $ 1,036 $ 1,424 ANNUAL BALANCE SHEET ASSETS Dec09 Dec08 Dec07 Dec06 Dec05 Cash & Equivalents $ 312 $ 465 $ 393 $ 634 $ 336 Net Receivables 3,692 3,780 3,895 3,705 3,332 Inventories 802 737 710 669 616 Other Current Assets 1,771 1,319 1,207 1,070 931 Total Current Assets 6,577 6,301 6,205 6,078 5,215 Gross Plant, Property & Equipment 24,669 23,714 22,579 21,907 20,818 Accumulated Depreciation 13,242 12,185 11,137 10,238 9,439 Net Plant, Property & Equipment 11,427 11,529 11,442 11,669 11,379 Investments at Equity 853 842 688 679 627 Other Investments 1,166 1,422 1,669 1,886 2,134 Intangibles 2,577 2,580 2,629 2,601 2,626 Deferred Charges 418 458 539 614 85 Other Assets 1,113 1,148 853 148 159 TOTAL ASSETS 24,131 24,280 24,025 23,675 22,225 LIABILITIES Long Term Debt Due In One Year 846 404 308 293 586 Accounts Payable 1,460 1,370 1,370 1,415 1,484 Taxes Payable - 224 190 - - Accrued Expenses 2,007 1,912 1,981 1,868 1,825 Total Current Liabilities 4,313 3,910 3,849 3,576 3,895 Long Term Debt 24,824 26,585 27,000 28,115 9,889 Deferred Taxes - - - 390 830 Minority Interest 1,008 995 938 907 828 Other Liabilities 2,825 2,890 2,612 1,936 1,920 TOTAL LIABILITIES 32,970 34,380 34,399 34,924 17,362 Preferred Stock 147 155 164 125 - Common Stock 1 1 1 1 4 Capital Surplus 226 165 112 - - Retained Earnings (9,213) (10,421) (10,651) (11,375) 4,859 Common Equity (8,986) (10,255) (10,538) (11,374) 4,863 TOTAL EQUITY (8,839) (10,100) (10,374) (11,249) 4,863 TOTAL LIABILITIES & EQUITY $ 24,131 $ 24,280 $ 24,025 $ 23,675 $ 22,225
Explanation / Answer
g. Please comment on HCA's capital structure. Is its 2009 debt level prudent? Is it smart to add another $1.53 billion to this total? Why, or why not?
Ans) 2009 debt level is not prudent because the company's debt is much higher than its assets.
The formula for calculating Debt ratio:
Total liabilities = $ 32,970
Total assets = $ 24,131
Debt ratio = Total liabilities/ Total assets
= 32,970 / 24,131
= 1.366 or 136.63%
Debt percentage is higher than 100% of assets and by Increasing the debt will affect the company's survival. So additional debt is not recommended
