Professor Damodaran: I am doing a valuation of hospital chain owner HCA. The company was taken private in 2006 (LBO) and then just taken public again last month. The private investors added massive amounts of debt to the balance sheet (along with a negative shareholder equity balance) using 3 massive dividend recaps to pay themselves out. The IPO sold for 30$ per-share. I used a 2-stage FCFF model and came up with a value of $31.53 a share. With the fact that the company is going to have to pay this debt down and the d/(d+e) ratio will change is that the right model to use in your opinion?

Question

Professor Damodaran: I am doing a valuation of hospital chain owner HCA. The company was taken private in 2006 (LBO) and then just taken public again last month. The private investors added massive amounts of debt to the balance sheet (along with a negative shareholder equity balance) using 3 massive dividend recaps to pay themselves out. The IPO sold for 30$ per-share. I used a 2-stage FCFF model and came up with a value of $31.53 a share. With the fact that  the company is going to have to pay this debt down and the d/(d+e) ratio will change is that the right model to use in your opinion?

anonymous · Answer

My objective is to determine whether or not the added debt due to the dividend recaps destroyed or added value and if so how much?