Hill Country Snack Food Co.

Case Solution
When the company entered 60% debt to capital ratio, the EPS increased from $2.88 to
$3.11, whereas the DPS increased from $0.85 to $0.93, which is a good sign for any
shareholder as well as the CEO and the management as they hold 16% of the shares.

The objective is to maximize shareholders’ wealth and to remain competitive, therefore the
best option is to keep optimal capital structure of the company.

Answer 2:

Recommendation of Debt to Capital Structure for Hill Country SnackFoods:

Problems without debt in capital structure:

 Many investors are frustrated by the company’s zero debt finance policy and excess
liquidity.
 The interest earned on cash is 0% which has contributed almost nothing to the net
income.
 Interest rates are currently at an unprecedented level with a market yield of 10
years, and the treasury bonds is fewer than 2% and the publicly traded ten years’
bond being traded at 3.8% yield to maturity.
 Avoidance of debt will decrease their return on equity therefore,if we bring debt
into the company, then it will increase Return on Equity.
 To earn a high rate of return on equity, there should be more reliance on debt rather
than equity.