| This problem asks you to analyze the capital structure of HCA, Inc., the largest private operator of health care facilities in the world. In 2006, a syndicate of private equity firms acquired the firm for $31.6 billion and took it private. In November 2010, as interest rates hit record lows, the company announced a dividend recapitalization in which it would distribute an extraordinary $2 billion dividend financed in large part by a $1.53 billion bond offering. |
| 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 $1.53 billion to this total? Why, or why not? |
Below is the data, and answer I calculated for a-d
HCA INC INCOME STATEMENT ($ millions) 2006 2007 2008 2005 2009 Sales 24,455 25,477 26,858 28,374 30,052 20,391 21,448 22,480 24,023 24,826 4,378 1,426 2,952 2,215 Cost of Goods Sold 4,029 1,391 2,638 Gross Profit 4,064 1,374 2,690 4,351 1,416 2,935 2,021 5,226 1,425 3,801 1,987 Depreciation Operating Profit Interest Expense Non-Operating Income/Expense 655 955 412 179 256 188 661 2,327 1,862 1,398 316 Pretax Income 1,170 268 2,002 Total Income Taxes 725 625 627 Minority Interest Net Income 201 208 229 321 178 1,424 1,036 874 673 1,054 BALANCE SHEET ($ millions) 2005 2006 2007 2008 2009 ASSETS Cash & Equivalents 336 634 393 465 312 Net Receivables 3,332 3,705 3,895 3,780 3,692 Inventories 616 669 710 737 802 1,771 6,577 Gross Plant, Property & Equipm 20,818 21,907 22,579 23,714 24,669 9,439 10,238 11,137 12,185 13,242 Net Plant, Property & Equipmen 11,379 11,669 11,442 11,529 11,427 Other Current Assets 931 1,070 6,078 1,207 6,205 1,319 6,301 Total Current Assets 5,215 Accumulated Depreciation Investments at Equity 627 679 688 842 853 Other Investments 2,134 2,626 1,886 2,601 1,669 2,629 1,422 2,580 1,166 2,577 Intangibles Deferred Charges 85 614 539 458 418 Other Assets 1,113 22,225 23,675 24,025 24,280 24,131 159 148 853 1,148 TOTAL ASSETS LIABILITIES Long Term Debt Due In One Yea Accounts Payable Taxes Payable Accrued Expenses 586 293 308 404 846 1,484 1,415 1,370 1,370 1,460 0 0 190 224 0 1,981 3,849 9,889 28,115 27,000 26,585 24,824 1,912 3,910 1,825 3,895 1,868 3,576 2,007 4,313 Total Current Liabilities Long Term Debt Deferred Taxes 830 390 0 0 0 Minority Interest Other Liabilities 1,008 2,825 17,362 34,924 34,399 34,380 32,970 147 907 828 938 995 2,612 1,920 1,936 2,890 TOTAL LIABILITIES Preferred Stock 0 125 164 155 Common Stock 4 1 1 1 1 Capital Surplus Retained Earnings Common Equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY 0 0 112 165 226 4,859 (11,375) (10,651) (10,421) (9,213) 4,863 (11,374) (10,538) (10,255) (8,986) 4,863 (11,249) (10,374) (10,100) (8,839) 22,225 23,675 24,025 24,280 24,131 Liability-to-asset ratios 2005 2009 1.37 2006 2007 2008 0.78 1.48 1.43 1.42 Time-interest-earned ratios 2009 1.91 2008 2005 2006 2007 4.11 2.76 1.33 1.45 |% decline of EBIT 2009 47.72% 2008 2005 2006 2007 75.65% 63.80% 24.97% 31.14% Cash Flow Volatility Cash Balance Current Year Cash Balance Previous Year Cash Flow Volatility 2009 2008 2005 2006 2007 336 634 393 465 312 336 465 634 393 32.90% 88.69% -38.01% 18.32% ROIC 2009 6.59% 2005 2008 2006 2007 9.65% 6.14% 5.26% 4.08% HCA INC INCOME STATEMENT ($ millions) 2006 2007 2008 2005 2009 Sales 24,455 25,477 26,858 28,374 30,052 20,391 21,448 22,480 24,023 24,826 4,378 1,426 2,952 2,215 Cost of Goods Sold 4,029 1,391 2,638 Gross Profit 4,064 1,374 2,690 4,351 1,416 2,935 2,021 5,226 1,425 3,801 1,987 Depreciation Operating Profit Interest Expense Non-Operating Income/Expense 655 955 412 179 256 188 661 2,327 1,862 1,398 316 Pretax Income 1,170 268 2,002 Total Income Taxes 725 625 627 Minority Interest Net Income 201 208 229 321 178 1,424 1,036 874 673 1,054 BALANCE SHEET ($ millions) 2005 2006 2007 2008 2009 ASSETS Cash & Equivalents 336 634 393 465 312 Net Receivables 3,332 3,705 3,895 3,780 3,692 Inventories 616 669 710 737 802 1,771 6,577 Gross Plant, Property & Equipm 20,818 21,907 22,579 23,714 24,669 9,439 10,238 11,137 12,185 13,242 Net Plant, Property & Equipmen 11,379 11,669 11,442 11,529 11,427 Other Current Assets 931 1,070 6,078 1,207 6,205 1,319 6,301 Total Current Assets 5,215 Accumulated Depreciation Investments at Equity 627 679 688 842 853 Other Investments 2,134 2,626 1,886 2,601 1,669 2,629 1,422 2,580 1,166 2,577 Intangibles Deferred Charges 85 614 539 458 418 Other Assets 1,113 22,225 23,675 24,025 24,280 24,131 159 148 853 1,148 TOTAL ASSETS LIABILITIES Long Term Debt Due In One Yea Accounts Payable Taxes Payable Accrued Expenses 586 293 308 404 846 1,484 1,415 1,370 1,370 1,460 0 0 190 224 0 1,981 3,849 9,889 28,115 27,000 26,585 24,824 1,912 3,910 1,825 3,895 1,868 3,576 2,007 4,313 Total Current Liabilities Long Term Debt Deferred Taxes 830 390 0 0 0 Minority Interest Other Liabilities 1,008 2,825 17,362 34,924 34,399 34,380 32,970 147 907 828 938 995 2,612 1,920 1,936 2,890 TOTAL LIABILITIES Preferred Stock 0 125 164 155 Common Stock 4 1 1 1 1 Capital Surplus Retained Earnings Common Equity TOTAL EQUITY TOTAL LIABILITIES & EQUITY 0 0 112 165 226 4,859 (11,375) (10,651) (10,421) (9,213) 4,863 (11,374) (10,538) (10,255) (8,986) 4,863 (11,249) (10,374) (10,100) (8,839) 22,225 23,675 24,025 24,280 24,131 Liability-to-asset ratios 2005 2009 1.37 2006 2007 2008 0.78 1.48 1.43 1.42 Time-interest-earned ratios 2009 1.91 2008 2005 2006 2007 4.11 2.76 1.33 1.45 |% decline of EBIT 2009 47.72% 2008 2005 2006 2007 75.65% 63.80% 24.97% 31.14% Cash Flow Volatility Cash Balance Current Year Cash Balance Previous Year Cash Flow Volatility 2009 2008 2005 2006 2007 336 634 393 465 312 336 465 634 393 32.90% 88.69% -38.01% 18.32% ROIC 2009 6.59% 2005 2008 2006 2007 9.65% 6.14% 5.26% 4.08%
