Hospital Corporation of America Harvard Case Solution & Analysis

Problem Statement

Hospital Corporation of America faces the problem of deciding what should be done to improve its capital structure. What major steps should be taken to achieve the desired mix of debt-equity and whether reducing the ratio of debt-equity to match the target debt-equity ratio will improve the performance of the corporation.

Overall Case Analysis

Currently, Hospital Corporation of America (HCA) has approached to 70% that is a high debt ratio and which is more than the target ratio of 60%. The increase in the debt ratio of the HCF has got the attention of the debt rating agencies who declared that in order to regain the debt position of A rating; Hospital Corporation of America should retain the capital structure of 60-40.

Some financial investors believe that use of leverage in more aggressive way present greater amount opportunities in the future for the Hospital Corporation of America while investors believe that HCA should remain conservative with the amendments in the Medicare/Medicaid reimbursement structure on the horizon.

Debt ratio is important for many reasons but it should not be considered the basis of the future of a company. In addition to this, the market will ultimately decide the value of the company based on the numerous other factors and not just the bond rating. HCA will have to decrease the growth rate or decrease debt and increase equity in order to decrease the debt ratio.

The Hospital Corporation of America currently holds the return on equity (ROE) of 14.48 %        (see excel sheet) in 1981, which increased from ROE 11.33% in 1972. Although, the ROE of HCA has increased from year 1972 to 1981 but still the ROE of the company is lower than the target return of equity (ROE) of 17%. Therefore, it is important for the HCA to maintain its ROE ratio because it is the main measure of efficiency that is used throughout the markets. If the Hospital Corporation of America is able to maintain the higher returns of equity then, it will be capable of generating more cash internally. The ROE is the most important ratio of the company’s financial policy.

Hospital Corporation Of America Case Solution

HCA may want to see the yearly growth rate in the 25-30% extent, despite the fact that they have additionally set the growth rate of at least 13%. This will indicate forceful movement in the organization and with this growth rate HCA will encounter a sensational build in ROE and leverage. An expanding growth rate does engage the financial specialists; however, is it important to assume this sort of risk when instabilities lay later on. Moreover a more critical fact is that, there is evidence that expanding growth does not make you more gainful. Since, HCA was founded; it had 32.2% annual revenue growth and 32.6% annual growth. Subsequently, the growth rate is not the sole determinant of future execution. Further, an organization surely needs to permit space for future development.

In the year 1981, the earnings per share of HCA has increased to $2.23 from $0.30 in the year 1972 (see excel sheet). The interest coverage ratio of the company had dropped to 2.4 times that was below their target of 3.0 times. The net profit margin of HCA showed fluctuation throughout the period of 10 years and in 1981 the net profit margin ratio was 4.6; which decreased as compared to 6.0 in 1972. The current ratio of the company was 1.4 in 1981 which slightly increased from 1.3 in 1980 (see excel sheet).........................................

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