Hill Country Snack Foods

Case Questions

• How much business risk does Hill Country face? How much financial risk would the company face at each of the three alternative debt-to-capital ratios presented in Exhibit 4? How much value could Hill Country create for its shareholders at each of these alternative debt levels? (To answer these questions you should use the following numbers from the spreadsheet: Sensitivity of net income to changes in EBIT, EPS, DPS, ROE, ROA, stock price, dividend yield)
• What debt-to-capital structure would you recommend as optimal for Hill Country Snack Foods? What are the advantages of adding debt to the capital structure? How would issuing debt impact company’s taxes and expected costs of financial distress? How would the financial markets react if the company increased its financial leverage? (To answer these questions you should use the following numbers from the spreadsheet: present value of debt tax shield, present value of benefits of debt, earnings available to security holders, cash payments available to security holders, income taxes, internal growth rate, bond rating)
• How could Hill Country implement a more aggressive capital structure? What methods could be used to increase debt and decrease equity?
• Considering Hill Country’s corporate culture, what arguments could you use to persuade CEO Keener or his successor to adopt and implement your recommendation?

I have posted a spreadsheet for analysis on Blackboard. You should first do “Analysis” and “Bond Rating Analysis” worksheets in the spreadsheet. Each number on those worksheets is there for a reason and should be commented on.