Hill Country Snack Food Co. Harvard Case Solution & Analysis

Hill Country Snack Food Co. Case Solution

Introduction:

Hill Country is located in Austin, Texas.It is the manufacturer of variety of snacks. Moreover,it can be seen that the company’s profits and sales had grown at a slow rate during the CEO,Keener’s tenure, which is not a positive sign for the company.The products of the company are sold in different schools with reduced fat or sugar, since the company focuses on its quality. Hill Country Snack Food simultaneously focused on sports events as well.Furthermore, it attempted to expand its presence into sports events, movie theatres and other leisure venues where there is high demand in those sectors.

Business Risks Faced By Hill Company:

Business risk is the risk of making low profits, which can be measured by operational gearing and interest coverage of the company. There are many business risks faced by the company such as there is no proper department for Operational Management and the CEO is directly involved in making budgets for the company, which shows dysfunctional behavior as well as the management does not have the expertise to manage unfavorable variances due to which the company will make low profits.

It can be seen that the management is risk averse as it does not want to take a risk as the management is the share holder of the company as well.The management holds approximately 17% of total shares, which is why it is not taking risks.

In a competitive industry where the competitor is Pepsi Co, which is a huge company in terms of market share, therefore in order to stay competitive, the management should take projects which are available rather than taking low-risk projects to increase operating profits in the short term.

The company’s management should make policy on long-term objectives rather than short-term cost reduction.

Financial Risks referring to Exhibit 4:

Financial risk is the risk of liquidation of a business In exhibit 4, when debt is entered into the company by 20% debt to equity ratio, then in such a case, the company is less risky as its interest cover is 36.90 times, which shows how much the company is able to pay interest on its profits. When 40% debt to equity ratio in the capital structure was applied, then its interest cover was 11.82 times which is good but when 60% of debt to equity ratio was applied, then the interest cover reduced to 4.52 which is not good.As far as the gearing of the company which is 20%, 40%, and 60% respectively, it should be on average level, which indicates that there is a balance of debt and equity. Furthermore,the company’s dividends reduced, which was not a good indicator as it showed that company was not performing well.

Based on Exhibit 2, it can be seen that Snyder’s Lance, which is of similar size as Hill Country, has more sales than Hill Country as well as it has more debt as well. Therefore, in order to remain competitive by entering debt to the capital structure, the company should increase its sales quickly by introducing debt give and providing an opportunity to remain competitive.

The biggest risk faced by the company is in the case of an economic turnaround, since this would affect the company if the company has debt and shareholders are not used to debt, therefore this is a major issue as well.

Values At each of three Alternative Debts:

By looking at exhibit 4, it can be seen that when the company entered 20% debt to capital ratio, the company’s EPS increased from $2.88 to $3.19, and the DPS increased from $0.85 to $0.95.

On the other hand, when the company entered 40% debt to capital ratio, its EPS increased from $2.88 to $3.31, which indicates that this is a good sign for the shareholders as they normally buy shares for capital gain or dividends...................

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