Hospital Corporation of America Case Study Solution
Financial targets set by HCA:-
HCA has several explicitly stated goals and objectives such as among them very important was its debt to equity ratio of 60%. The target ratio was in line with the degree of leverage more or less expected by the rating agencies for an A rated hospital management.Furthermore, the return on the capital employed to be minimum be of the 11% after taxes and the return on the equity was expected to be at least 17% after the tax. The target for the HCA is very important but seems to be difficult for them to achieve. To achieve the target hospital needed to turn around, and this process often took several years of operations with reduced profit margins.Finally, HCA targeted a dividend payout of 15% of the net income and the maintenance or improvement of the net profit margins.
CAPM Model (Risk and Returns):-
It is the general principal that the higher the risk will results in higher the return. The (CAPM) Capital Asset Pricing Model that describes the relationship between the risk and expected return and that is used in the pricing of the risky securities. The general idea behind the CAPM is that investor needs to be compensated in two ways: time value of the money and risk.
The CAPM takes a lot of assumptions such as that the company can borrow unlimited amount under the risk-free rate of return, this cannot be possible in the practical scenario. Furthermore, the companies pursue to maximize the expected utility of their portfolios over a single period planning horizon and CAPM also assume that all information is available to the company. Moreover, the CAPM assumes that market is perfect, there are no taxes, no transaction cost, securities are completely divisible and the market is competitive.
Implication and relevance of the CAPM:-
- The investor will always combine a risk-free asset with a market portfolio of risky assets. The investor will invest in risky assets. Investors will invest in risky assets in proportion to their market value.
- An investor can expect returns from their investment according to the risk as this suggests a liner relationship between the asset’s expected returns and its beta.
Limitations of the CAPM:-
Capital Asset pricing model is based on unrealistic assumptions and it is difficult to test the validity of CAPM. Furthermore, in the calculation of the CAPM it includes the Betas and Beta do not remain stable over time.
Managing the hospital growth:-
To manage the hospital growth it requires the management to focus on the patient’s experience. This will require a thorough understanding of who the hospital customer is and how to customize and optimize hospital offerings. The database will provide insights into setting patient-centered growth strategies that include managing both internal and external people. Furthermore, active learning of the critical concepts such as customer orientation, integrated marketing communications, and branding strategies will be encouraged.
Financial analysis of HCA:-
By looking at the past performance of the company, it seems that the company performed well. However, it failed to meet some of its objectives. Now based on the projected income statement, it seems that the performance is excellent, as the revenues are increasing over the years. Furthermore, the Earning per share is also increasing from the $1.34 (1979) to $4.79 (1984) over the six years.
Moreover, the Hospital Corporation has made some targets. The hospital made a target that the return on equity must be 17%, by looking at the projected ratios, it seems that company is able to meet its target because the return on equity is 21%. The most important target is to maintain the debt to equity ratio to 60%, by looking at the estimated ratio, it seems that the company is unable to meet its targets, only relying on debt financing rather than equity financing. The last target of the Hospital Corporation of America to achieve the 11% return on the capital employed. By looking at the projected ratios, it seems that the hospital is unable to achieve its required target.
The free cash flow shows that the hospital would have negative cash flows in future due to heavily investing in the fixed assets. This will improve the ability to generate future profits from that assets.
Value creation:-
Value creation means whose activities that create value to the patient treatment. Such as the quality of the services, quality of the material being used in the hospitals etc.
The hospital should maintain the activities that create value for the patient. If the activities are removed from the hospital then it will significantly affect the revenue of the company. However, the Hospital Corporation of America is profit based organization so it will also ultimately affects the profitability of the hospital.
Investment selection method:-
Prosperity hospitals create an opportunity for the private investors to build or acquire hospitals and operate them profitability. The growth in this industry seems to be the high. To invest in the hospital the financing can be through the equity issue or the private equity. Furthermore, the future of the hospital management industry appeared bright in several respects. In terms of the near growth, it continued growth in revenues and earnings. However, the industry growth was not without risks. The federal government had been exploring ways to cut federal expenses for the Medicare, VA hospitals and the other government backed health programs.
The regulatory reform of healthcare could have far reaching implications for the hospital management companies such as under the present regulatory system the license was required and the license will be granted to if it could demonstrate that genuine need existed for the new services, seems to be headache for hospitals. However,they restricted new hospital construction and thus tended to provide existing hospitals with protected franchises. Under the new proposal this will be eliminated these certificates, this will result in increased competition in hospital industry.
Hospital Corporation of America Harvard Case Solution & Analysis
Hospital seems to the excellent opportunity for the investor to invest and increase the wealth. However, the greater return will also bring the greater risk such as general rule is that the risk is high in hospitality industry especially in hospital. Thus, the investor should outweigh the cost and benefits according to his risk bearing ability and invest accordingly....................
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