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  • Essay / Hospital Corporation of America - 1494

    Hospital Corporation of America (HCA)Staff AnalysisProblem StatementHCA, having followed a conservative financial policy since its inception, entered the new decade preparing to make some changes in order to realign its financial strategy. and capital structure. Since its inception, HCA has often been used as a measure for the entire exclusive hospital sector. Is it now time for the market to realign its expectations of the industry as a whole? HCA has target goals that must be achieved in order to achieve milestones in the future. The problem arises as to which area is a priority for the company. HCA must decide how to approach key elements of its financial strategy and policy in order to achieve its future goals. Context HCA has set objectives in several areas and it is important to identify priority objectives: debt ratio, growth rate, ROE. , and Bond Rating.Debt Ratio: Currently, HCA is approaching a record debt ratio of 70%, well above its established target ratio of 60%. The increase in debt ratio caught the attention of rating agencies who clearly stated that in order for HCA to maintain its A bond rating, HCA needed to return to its 60-40 capital structure. The question now arises whether an A rating should be sought or whether HCA should adopt a less conservative stance. Some investors believe that more aggressive use of leverage would present greater opportunities in the future. Others believe that with upcoming changes to the Medicare/Medicaid reimbursement structure, HCA should remain conservative. In order to decrease the debt ratio, HCA would have to 1) decrease the growth rate (inadvertently decreasing ROE) or 2) decrease debt/increase equity. Debt ratio is important for many reasons, but it should not be the basis for a company's future. The market will ultimately decide value based on many facts, not just the bond's rating. Growth rate: HCA would like to see the annual growth rate be between 25 and 30 percent, although it has also set a minimum of 13 percent. This would signal aggressive action by the company, and with this growth rate, HCA would experience a dramatic increase in ROE as well as leverage. Why would HCA want to take on a debt ratio of 86% (see case study) 1)?