Humana Incorporation Case Study Solution
Another diverse element of the new substance is handling the Hospital’s administration without effecting the well being plan plans, which would make a contention between the doctors and the Humana. In this way, autonomous plans would be made so as to control the expense of outpatient exercises by enabling the opportunity for each part to pick the doctor they need.Yet the administration charges would increase in order to have certain benefits for the new substance.
The last highlight of the new budgetary structure is issuing the new normal offers exceptional from the old exchanged stocks revenue driven augmentation of the new investors, and to pay off the specific obligation figure to recapture the situation inside the market. The organization’s administration and the board would hold lion’s share of the new normal stocks through repurchasing them so that they could have an increased profit in the future.
In the wake of investigating the potential advantages of the new substance; the monetary structure of Hospital section would improve if certain procedures and authoritative structures are pursued.
Results of Spin off Alternative on Shareholders Wealth:
The process of spin-off which splits two segments of the organization to form two separate organizations, where the parental organization involves the distribution of new shares with its shareholders, in the premises of the organization, allowing them and future investors for the proper valuing of each segment as an individual firm.
The focus of management on the business for the purpose of strategy creation,is considered significant for each segment in creation of the value through their individual performance.
Spinning off industry of hospital and Health plan will allow them to focus on their own businesses. This allows the creation of models of with their own respect and to focus on their own aims and objectives to be accomplished. It assists both the organizations in pursuing their goals while focusing on their own business rather than each other’s, to gain a long-term advantage.
In Humana, the process of Spin off assists in the recognition of cost and their activity result remains ineffective with the overall organization’s outcome, if the Hospital industry growth is quick or not in comparison to the Health Plan. The cost outcomes of Hospital industry will not be affected by the high Health Plan overheads, providing shareholders with help in recognizing the organization’s true value.
Undermining of goof operations of Health Plan is not supported by shareholders because of poor Hospital industry outputs. It assists in increasing the value and the cost of Health Plan industry, creating negative effect on the industry of hospital. Conclusively, it shows the true image of the Humana hospital operations.
Expected Price to Get the Spin Off Alternative:
In first phase for calculating the expected price of spin off value, the weighted average cost of capital (WACC) has been calculated. For the purpose of calculating the WACC; the unlevered beta has been calculated by using levered beta of National Medical Enterprises, which is one of the toughest competitors of the Humana Incorporation.
The reason to choose the levered beta of National Medical Enterprises is its debt to equity ratio of 39 percent, which is nearest to the Humana Incorporation’s debt to equity ratio i.e. 23 percent.By using this unlevered beta, we have found the levered beta of Humana Incorporation by using its debt to equity ratio, which ultimately led to find out the value of the required equity rate of return.
By using the weight of debt and weight of equity, and the required equity rate of return and the required debt rate of return; the weighted average cost of capital (WACC) has been calculated, which is almost 8 percent for the company to perform the discounted cash flow analysis (DCF) before the spin-off and after the spin-off.
So, after performing the detailed financial analysis, which is shown in Exhibit 1 of the report, it has been concluded that the spin-off alternative is best option to create value for the company and its shareholders, because the total value after performing the spinoff is 2,737 million US dollars, while the total value before performing the spinoff is (1,125) million US dollars.
Exhibit 1: Total Value before Spin Off and After Spin Off
| Hospitals | |
| EBITDA | 904.00 |
| Less Depreciation & amortization | 210.00 |
| Less Interest | 24.00 |
| EBIT | 670.00 |
| Tax | 241.44 |
| NOPAT | 428.56 |
| Add back Depreciation | 210.00 |
| Less CAPEX | 396.00 |
| FREE CASH FLOW | 242.56 |
| PRESENT VALUE (Perpetuity) | 2,938.97 |
| Health plans | |
| EBITDA | 100.00 |
| Less Depreciation & amortization | 26.00 |
| Less Interest | (36) |
| EBIT | 110.00 |
| Tax | 39.64 |
| NOPAT | 70.36 |
| Add back Depreciation | 26.00 |
| Less CAPEX | 113.00 |
| FREE CASH FLOW | (16.64) |
| PRESENT VALUE (Perpetuity) | (201.61) |
| Corporate | |
| EBITDA | (159) |
| Less Depreciation & amortization | 20.00 |
| Less Interest | (123) |
| EBIT | (56.00) |
| Tax | (20.18) |
| NOPAT | (35.82) |
| Add back Depreciation | 20.00 |
| Less CAPEX | 77.00 |
| FREE CASH FLOW | (92.82) |
| PRESENT VALUE (Perpetuity) | (1,124.65) |
| Tax Rate | 36% |
| WACC | 8% |
| Inflation Rate / Growth Rate | 3% |
| TOTAL VALUE BEFORE SPIN OFF | (1,124.65) |
| TOTAL VALUE AFTER SPIN OFF | 2,737.35 |
Exhibit 2: Calculations for Weighted Average Cost of Capital (WACC)
| WACC Calculations | |
| Bond Rates | 6% |
| Risk Free Rate | 4% |
| Market Risk Premium | 5% |
| Unlevered Beta | 0.92 |
| Debt to Equity Ratio | 24% |
| Levered Beta | 1.06 |
| Required return of Equity | 9% |
| Debt Rate After Tax | 4% |
| Total Debt in Millions | 846 |
| Total Equity in Millions | 3,581 |
| Weight of Debt | 19% |
| Weight of Equity | 81% |
| WACC | 8% |
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