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Chapter 6 Problem 14 a. What were HCA's liabilities-to-assets ratios and times-interest-earned ratios in the years...

Chapter 6 Problem 14
a. What were HCA's liabilities-to-assets ratios and times-interest-earned ratios in the years 2005 through 2009?
b. What percentage decline in EBIT could HCA have suffered each year between 2005 and 2009 before the      company would have been unable to make interest payments out of operating earnings, where operating earnings is defined as EBIT?  
c. How volatile have HCA's cash flows been over the period 2005 - 2009?
d. Calculate HCA's return on invested capital (ROIC) in the years 2005 - 2009.
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 $1.53 billion to this total? Why, or why not?
HCA INC
ANNUAL INCOME STATEMENT
($ MILLIONS, EXCEPT PER SHARE)
Dec09 Dec08 Dec07 Dec06 Dec05
Sales $       30,052 $       28,374 $       26,858 $       25,477 $       24,455
Cost of Goods Sold           24,826           24,023           22,480           21,448           20,391
Gross Profit             5,226             4,351             4,378             4,029             4,064
Depreciation             1,425             1,416             1,426             1,391             1,374
Operating Profit             3,801             2,935             2,952             2,638             2,690
Interest Expense             1,987             2,021             2,215                955                655
Non-Operating Income/Expense                188                256                661                179                412
Pretax Income             2,002             1,170             1,398             1,862             2,327
Total Income Taxes                627                268                316                625                725
Minority Interest                321                229                208                201                178
Net Income $         1,054 $            673 $            874 $         1,036 $         1,424
ANNUAL BALANCE SHEET
ASSETS Dec09 Dec08 Dec07 Dec06 Dec05
Cash & Equivalents $            312 $            465 $            393 $            634 $            336
Net Receivables             3,692             3,780             3,895             3,705             3,332
Inventories                802                737                710                669                616
Other Current Assets             1,771             1,319             1,207             1,070                931
Total Current Assets             6,577             6,301             6,205             6,078             5,215
Gross Plant, Property & Equipment           24,669           23,714           22,579           21,907           20,818
Accumulated Depreciation           13,242           12,185           11,137           10,238             9,439
Net Plant, Property & Equipment           11,427           11,529           11,442           11,669           11,379
Investments at Equity                853                842                688                679                627
Other Investments             1,166             1,422             1,669             1,886             2,134
Intangibles             2,577             2,580             2,629             2,601             2,626
Deferred Charges                418                458                539                614                  85
Other Assets             1,113             1,148                853                148                159
TOTAL ASSETS           24,131           24,280           24,025           23,675           22,225
LIABILITIES
Long Term Debt Due In One Year                846                404                308                293                586
Accounts Payable             1,460             1,370             1,370             1,415             1,484
Taxes Payable                  -                  224                190                  -                    -  
Accrued Expenses             2,007             1,912             1,981             1,868             1,825
Total Current Liabilities             4,313             3,910             3,849             3,576             3,895
Long Term Debt           24,824           26,585           27,000           28,115             9,889
Deferred Taxes                  -                    -                    -                  390                830
Minority Interest             1,008                995                938                907                828
Other Liabilities             2,825             2,890             2,612             1,936             1,920
TOTAL LIABILITIES           32,970           34,380           34,399           34,924           17,362
Preferred Stock                147                155                164                125                  -  
Common Stock                   1                   1                   1                   1                   4
Capital Surplus                226                165                112                  -                    -  
Retained Earnings            (9,213)          (10,421)          (10,651)          (11,375)             4,859
Common Equity            (8,986)          (10,255)          (10,538)          (11,374)             4,863
TOTAL EQUITY            (8,839)          (10,100)          (10,374)          (11,249)             4,863
TOTAL LIABILITIES & EQUITY $       24,131 $       24,280 $       24,025 $       23,675 $       22,225

Solutions

Expert Solution

Dec-09 Dec-08 Dec-07 Dec-06 Dec-05
ANSWER A
Liabilities to asset ratio=
total liability/total asset 1.366292 1.41598 1.4318 1.475143 0.781192
times-int-earned ratio=
EBIT/Interest charges
EBIT 3801 2935 2952 2638 2690
INT 1987 2021 2215 955 655
EBIT/Interest charges 1.912934 1.452251 1.332731 2.762304 4.10687
ANSWER B
PERCENTAGE DECLINE IN EBIT
Dec-06 1.933086 %
Dec-07 -10.6369 %
Dec-08 0.575881 %
Dec-09 -29.506 %
ANSWER C
Income deviation deviation square
Dec-05 1424 411.8 169579.2
Dec-06 1036 23.8 566.44
Dec-07 874 -138.2 19099.24
Dec-08 673 -339.2 115056.6
Dec-09 1054 41.8 1747.24
total 5061 0.00 306048.80
mean= 1012.2
variance= 61209.76
std deviation= 247.4061
ANSWER D Dec-09 Dec-08 Dec-07 Dec-06 Dec-05
RETURN ON INVESTED CAPITAL=
earning/invested capital*100 -11.9244 -6.663366 -8.42491 -9.20971 29.28234

jeff jeffy answered 2 years ago
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