Chapter 6 Problem 14

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) 2005 2006 2007 Sales 24,455 25,477 26,858 Cost of Goods Sold 20,391 21,448 22,480 Gross Profit 4,064 4,029 4,378 Depreciation 1,374 1,391 1,426 Operating Profit 2,690 2,638 2,952 Interest Expense 655 955 2,215 Non-Operating Income/Expense 412 179 Pretax Income 2,327 1,862 1,398 Total Income Taxes 725 625 316 Minority Interest 178 201 208 Net Income 1,424 1,036 874 2008 2009 28,374 30,052 24,023 24,826 4,351 5,226 1,416 1,425 2,935 3,801 2,021 1,987 256 188 1,170 2,002 268 229 321 673 1,054 661 627 BALANCE SHEET ($ millions) ASSETS 2005 2006 2007 2008 2009 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 Other Current Assets 931 1,070 1,207 1,319 1,771 Total Current Assets 5,215 6,078 6,205 6,301 6,577 Gross Plant, Property & Equipm 20,818 21,907 22,579 23,714 24,669 Accumulated Depreciation 9,439 10,238 11,137 12,185 13,242 Net Plant, Property & Equipmen 11,379 11,669 11,442 11,529 11,427 Investments at Equity 627 679 688 842 853 Other Investments 2,134 1,886 1,669 1,422 1,166 Intangibles 2,626 2,601 2,629 2,580 2,577 Deferred Charges 85 614 539458 418 Other Assets 159 148 853 1,148 1,113 TOTAL ASSETS 22,225 23,675 24,025 24,280 24,131 LIABILITIES Long Term Debt Due In One Yea 586 293 308 404 846 Accounts Payable 1,484 1,415 1,370 1,370 1,460 Taxes Payable 0 190 224 Accrued Expenses 1,825 1,868 1,981 1,912 2,007 Total Current Liabilities 3,895 3,576 3,849 3,910 4,313 Long Term Debt 9.889 28.115 27.000 26.585 24.824 Deferred Taxes 830 390 0 0 0 Minority Interest 828 907 938 995 1,008 Other Liabilities 1,920 1,936 2,612 2,890 2,825 TOTAL LIABILITIES 17,362 34,924 34,399 34,380 32,970 Preferred Stock 0 125 164 155 147 Common Stock 4 1 1 1 Capital Surplus 0 0 112 165 226 Retained Earnings 4,859 (11,375) (10,651) (10,421) (9,213) Common Equity 4,863 (11,374) (10,538) (10,255) (8,986) TOTAL EQUITY 4,863 (11,249) (10,374) (10,100) (8,839) TOTAL LIABILITIES & EQUITY 22,225 23,675 24,025 24,280 24,131 Liability-to-asset ratios 2005 2006 0.78 1.48 2007 1.43 2008 1.42 2009 1.37 Time-interest-earned ratios 2005 2006 4.11 2.76 2007 1.33 2008 1.45 2009 1.91 % decline of EBIT 2005 2006 75.65% 63.80% 2007 24.97% 2008 31.14% 2009 47.72% Cash Flow Volatility Cash Balance Current Year Cash Balance Previous Year Cash Flow Volatility 2005 336 - 2006 634 336 88.69% 2007 393 634 -38.01% 2008 465 393 18.32% 2009 312 465 -32.90% ROIC 2005 9.65% 2006 6.14% 2007 5.26% 2008 4.08% 2009 6.59% HCA INC. INCOME STATEMENT ($ millions) 2005 2006 2007 Sales 24,455 25,477 26,858 Cost of Goods Sold 20,391 21,448 22,480 Gross Profit 4,064 4,029 4,378 Depreciation 1,374 1,391 1,426 Operating Profit 2,690 2,638 2,952 Interest Expense 655 955 2,215 Non-Operating Income/Expense 412 179 Pretax Income 2,327 1,862 1,398 Total Income Taxes 725 625 316 Minority Interest 178 201 208 Net Income 1,424 1,036 874 2008 2009 28,374 30,052 24,023 24,826 4,351 5,226 1,416 1,425 2,935 3,801 2,021 1,987 256 188 1,170 2,002 268 229 321 673 1,054 661 627 BALANCE SHEET ($ millions) ASSETS 2005 2006 2007 2008 2009 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 Other Current Assets 931 1,070 1,207 1,319 1,771 Total Current Assets 5,215 6,078 6,205 6,301 6,577 Gross Plant, Property & Equipm 20,818 21,907 22,579 23,714 24,669 Accumulated Depreciation 9,439 10,238 11,137 12,185 13,242 Net Plant, Property & Equipmen 11,379 11,669 11,442 11,529 11,427 Investments at Equity 627 679 688 842 853 Other Investments 2,134 1,886 1,669 1,422 1,166 Intangibles 2,626 2,601 2,629 2,580 2,577 Deferred Charges 85 614 539458 418 Other Assets 159 148 853 1,148 1,113 TOTAL ASSETS 22,225 23,675 24,025 24,280 24,131 LIABILITIES Long Term Debt Due In One Yea 586 293 308 404 846 Accounts Payable 1,484 1,415 1,370 1,370 1,460 Taxes Payable 0 190 224 Accrued Expenses 1,825 1,868 1,981 1,912 2,007 Total Current Liabilities 3,895 3,576 3,849 3,910 4,313 Long Term Debt 9.889 28.115 27.000 26.585 24.824 Deferred Taxes 830 390 0 0 0 Minority Interest 828 907 938 995 1,008 Other Liabilities 1,920 1,936 2,612 2,890 2,825 TOTAL LIABILITIES 17,362 34,924 34,399 34,380 32,970 Preferred Stock 0 125 164 155 147 Common Stock 4 1 1 1 Capital Surplus 0 0 112 165 226 Retained Earnings 4,859 (11,375) (10,651) (10,421) (9,213) Common Equity 4,863 (11,374) (10,538) (10,255) (8,986) TOTAL EQUITY 4,863 (11,249) (10,374) (10,100) (8,839) TOTAL LIABILITIES & EQUITY 22,225 23,675 24,025 24,280 24,131 Liability-to-asset ratios 2005 2006 0.78 1.48 2007 1.43 2008 1.42 2009 1.37 Time-interest-earned ratios 2005 2006 4.11 2.76 2007 1.33 2008 1.45 2009 1.91 % decline of EBIT 2005 2006 75.65% 63.80% 2007 24.97% 2008 31.14% 2009 47.72% Cash Flow Volatility Cash Balance Current Year Cash Balance Previous Year Cash Flow Volatility 2005 336 - 2006 634 336 88.69% 2007 393 634 -38.01% 2008 465 393 18.32% 2009 312 465 -32.90% ROIC 2005 9.65% 2006 6.14% 2007 5.26% 2008 4.08% 2009 6.59%