Question

Your task is to determine the WACC for a healthcare organization. Your deliverable is a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide a relevant discussion of your findings. Chapter 7 covers the basic concepts of WACC. Refer to the WACC formula at the bottom of page 341: WACC = Kd(1-t)(D / V) + Ke(E/V) Company HCA Healthcare (Stock Ticker Symbol: HCA) Assumptions: HCA has a cost of debt of 6%, a corporate tax rate of 40%, and a debt weight of 60%. HCA has a cost of equity of 11.4% and an equity weight of 40%.

Submit the following: Write a 350- to 700-word report that contains the following elements:

• Your calculated WACC. Describe how you used the assumptions to calculate the WACC.

• What does HCA’s WACC indicate? How could decision makers use this information?

• How would an increase in equity or debt impact the WACC?

• US corporate tax rates were reduced to 21% starting in 2018. Recalculate your WACC based on the new tax rates. Describe the impact of changes in corporate tax rates on HCA’s WACC. • Is a higher WACC good or bad? Support your answer.

Include the math used for your calculations.

Answer 1

Cost of Debt, Kd 6%

Debt weight, D 60%

Cost of Equity, Ke 11.40%

Equity weight, E 40%

Tax rate, t 40%

Total Value, V 100%

WACC = Kd*(1-t)*(D/V) + Ke*(E/V)

WACC = 6%*(1-40%)*60% + 11.40%*40%

WACC = 6.72%

The WACC of HCA indicates that the company needs atleast a return of 6.72% on its investment in new projects to accept the projects. It can use this information to take prudent decisions with regards to capital budgeting and deciding on the mix of the projects that the company should undertake in order to grow the company in a sustainable manner. Moreover, any project which produces return below this would ultimately lead to erosion of value.

Also, the company through calculation of WACC can understand that its cost of debt, cost of equity and structure of capital should be monitored and controlled in a manner which prevent any undue escalation of WACC and thus reduction in the scope to undertake new projects and reduction in firm value.

Change in tax rates

Cost of Debt, Kd 6%

Debt weight, D 60%

Cost of Equity, Ke 11.40%

Equity weight, E 40%

Tax rate, t 21%

Total Value, V 100%

WACC = Kd*(1-t)*(D/V) + Ke*(E/V)

WACC = 6%*(1-21%)*60% + 11.40%*40%

WACC = 7.40%

The WACC increases due to reduction in taxes because the tax shield impact reduces significantly. A high WACC presents a higher hurdle rate for the company to invest and thus many potentially useful projects may not be undertaken because of the higher WACC value.