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Case Study: Hill Country Snack Foods Co
Case Study: Hill Country Snack Foods Co
2013
Recap: Hill Country Snack Foods Co. (HC) has been an all
equity-financed company with a debt-to-capital ratio of 0%. Its
corporate culture is characterized by caution and risk-aversion
whereas increasing shareholder value has been one of HCs
most important objectives. Following recommendations given
in Questions 1 3, HC should implement a more aggressive
capital structure.
1
[] a firm should increase debt until the value from PV (tax
shield) is just offset, [], by increases in PV (costs of financial
distress)1, i.e. that there is an optimal point of how much
money a firm should borrow.
With the already presented advantages one could be able to
convince the CEO of a new capital structure. But one should
not exaggerate with borrowing too much debt, i.e. one should
be aware of not exceeding the optimal debt ratio which would
be at highest 40% (as shown in the question 2). Otherwise the
interest expenses increase, and thus would lead to decreased
EPS. Since exceeding the optimal debt ratio can lead to
financial distress, the stock price would decrease.
In conclusion we can say that taking debt is always
advantageous until reaching the optimal debt ratio.
References