Question

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?

Answer 1

Answer:

The times interest earned ratio will reduce

Explanation:

The times interest earned ratio is a ratio that looks at how many times a companies earnings from operations can cover the loan interest it has to pay in a year.

It is calculated by the formula Earnings Before Interest and Tax divided by the interest expense.

Therefore looking at the scenario, if HCA increases its debt level by issuing a $1.53 billion bond, this will increase its interest expense significantly and the number of times its earnings will cover its interest expense will be remarkably lower.

Therefore the times interest earned ratio will reduce

Answer 2

Answer:

new TIE ratio = 1.83

the new bonds will result in a 4.2% decrease in TIE ratio

Explanation:

times-interest-earned (TIE) ratio = EBIT / interest expense

HCA's TIE ratio in 2009 was = $3,801 million / $1,987 million = 1.91

the proposed bond offering will increase interest expense by = $1,530 million x 6% = $91.8 million

HCA'a TIE ratio after bonds are issued = $3,801 million  / ($1,987 million + $91.8 million) = 1.83

the new bonds will result in a (1.91 - 1.83) / 1.91 = -4.2% decrease in TIE ratio