question archive HCA Healthcare is considering an acquisition of Mission Health
HCA Healthcare is considering an acquisition of Mission Health
Subject:FinancePrice: Bought3
HCA Healthcare is considering an acquisition of Mission Health. Mission
Health is a publiclytraded company, and its current beta is 1.30. Mission Health has been barely profitable and had paid an averageof only 20 percent in taxes during the last several years. In addition, it uses little debt, having a debtratio of just 25 percent. If the acquisition were made, HCA would operate Mission Health as a separate,wholly owned subsidiary. Mission Health would pay taxes on a consolidated basis, and the tax rate wouldtherefore increase to 35 percent. HCA also would increase the debt capitalization in the Mission Healthsubsidiary to 40 percent of assets, which would increase its beta to 1.50. HCA estimates thatMission Health if acquired, would produce the following net cash flows to HCA's shareholders (in millionsof dollars):YearFree Cash Flows to Equityholders1$1.302$1.503$1.754$2.005 and beyondConstant growth at 6%These cash flows include all acquisition effects. HCA's cost of equity is 14 percent, its beta is 1.0,and its cost of debt is 10 percent. The risk-free rate is 8 percent.a. What discount rate should be used to discount the estimated cash flow? (Hint: Use HCA's cost of equity to determine the market risk premium.)b. What is the dollar value of Mission Health to HCA's shareholders?
