HAC case study 1. Assess HCA’s performance and business strategy. How are these
ID: 452863 • Letter: H
Question
HAC case study
1. Assess HCA’s performance and business strategy. How are these likely to
change in the future? Specifically, what is the likely impact of the proposed change
to “prospective reimbursement” by Medicare/Medicaid programs? More generally,
should HCA push for maximum growth, or slow down and focus on increasing
profitability?
2. How does HCA’s financial strategy affect its product-market strategy?
How important is finance to HCA? In what ways?
3. Evaluate HCA’s set of financial goals. Are they achievable as a group?
Which are most important and why? How might HCA’s debt policy affect its ability
to achieve these goals? How might it affect HCA’s ability to raise funds in capital
markets?
5. What specific financing action would you recommend that HCA
implement in January 1982?
Explanation / Answer
Answer-1
HCA’s strategy ia linked to the growth of 25-30% (including inflation effects) for several years in the future. The hospital has grown over the years by acquiring new hospitals etc.. However, in the future, especially with regulatory changes in the pipeline, HCA might have to shift its focus from growth to profitability. The hospital’s profitability (or even survival) would be linked to cost of services provided. So the growth would have very high investment costs which would put a lot of pressure on HCA’s return on investment. Therefore, in light of the upcoming “prospective reimbursement” regulations, it would be more effective to consider focusing on profitability instead of growth.
Answer-2
HCA’s financial strategy would affect its growth strategy as acquisitions as well as constructions of new hospitals requires more resources and capital structure. The debt ratio also affects the efficiency of HCA in raising funds in the capital market. Naturally finance is very important area for the company to look upon. It’s debt ratio is crucial in how it grows as well as the way it copes with the anticipate regulatory changes. In addition, HCA’s earnings per share affect its profitability and stock performance.
Answer-3
3.
HCA’s has a financial goal to maintain debt equity ratio of 60%, return on capital was expected to stay around 11% after taxes, return on equity around 17% after taxes and dividend payout of 15% of net income as well as maintenance and improvement of net profit margin as a percentage of operating revenues.
Also, the CFO wanted the average interest cost of HCA’s debt at 15% or lower. Since the 60% figure was arrived at during HCA’s initial years by cutting down from the average debt for real estate development projects, it was thought that it would be a smaller number. It was argued that the debt ratio should be maintained to be as high as 75%-80% to accommodate HCA’s growth strategy in the future. The availability of debt would be helpful in acquisition and construction projects to achieve the required growth. However, an increased debt ratio would lead to a drop in HCA’s credit rating. This would lead to a limitation in raising capital via bonds. Moreover, 60% might be a high number considering the potential changes in the regulatory environment.
Answer-5 In the company there will need to be equity capital infusion along with issue of new debts to maintain aggressive debt to capital ratio of 76%. Debt coverage ratio for HCA remains fairly comfortable at 5.34. But given the current market conditions, with equity stock price being significantly undervalued in comparison to the current conditions, amount raised through equity issue will be low. Therefore, for meeting the US $ 575 mn capital expenditure requirements for FY 1982, we recommend that the entire amount be raised through issuing 25 year debentures at rate of 16.5%.
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