Statement of Problem
HCA, after following a conservative financial policy since its establishment, has entered the new decade preparing to make some changes in order to realign their financial strategy and capital structure. Since establishment, HCA has often been used as a measure for the entire proprietary hospital industry. Is it now time for the market to realign their expectations for the industry as a whole? HCA has target goals which need to be met in order to accomplish milestones in the future. The problem arises as to which area holds priority to the company. HCA must decide how the key components of their financial strategy and policy should my approached in order …show more content…
If HCA is ready to take a more moderate financial policy stance, then this is not the right decision.
Scenario 3 Meet Target Growth Rate
This alternative allows HCA to meet their target growth rate of 25% which would in effect raise their debt ratio by 17% and definitely cause their rating to drop.
Debt = 86%
ROE = 29.4%
G = 25%
As previously discussed, growth rates do not directly improve the profitability and certainly not the stability of a company (Case Exhibit 2, Humana). The increase in growth rates would cause an increase in the ROE, but is it worth taking on such hefty leverage? By committing to the target growth rate, HCA would also be acquiring much higher risk and decreased stability. If they effectively take on this risk and manage their debt well, the decision could be quite profitable in the long term. Consequently, by placing their growth rate at such an elevated percent, HCA will have to continue this trend because a decline would signal the market. In addition, with changes looming in the Medicare/Medicaid reimbursement program, HCA should be cautious of making such dramatic changes.
Scenario 4 - Meet Minimum Growth Rate, ROE and decrease Debt
In this alternative HCA focuses on a medium of all of their goals. The meet their target ROE, the growth rate is above the minimum, and they have decreased debt to prepare for changes.
Debt = 66.67%
ROE = 17%
G = 14.45%