HILL COUNTRY SNACK FOODS CO. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

HILL COUNTRY SNACK FOODS CO. Case Solution

Introduction

Hill County Snack and Foods is a key manufacturer of snacks, which is located in Austin, United States. The company’s CEO is about to retire and it has been observed that the company’s profitability and sales are growing at a very slow rate. The company places high focus over maintaining the quality of its products, as the products are made with lower fats and sugar levels and these are delivered to schools in different vicinities. The company also places its focus over the sports’ events in schools. The company has an objective to reduce its dependence over the equity based financing by adopting an aggressive debt financing.(W. Carl Kester, 2012) Three different levels of debt have been considered in order to determine the optimal capital structure.

Problem Statement

The company’s Chief Executive Officer, Howard Keener has been considering to increase the shareholders’ value. Over the time, the company has remained dependent over equity financing, in order to remain secure from the risks attached with debt financing. But upon his retirement, the company’s CEO and the shareholders assumed that the company must adopt aggressive financing policy by using debt financing, in order to maximize the shareholders’ value and to increase the company’s profitability and its sales growth rate. The CEO is focused on issuing debt and repurchasing the stock, while maintaining an optimal capital structure oran optimal debt to equity ratio.

Analysis

Three debt structures,i.e. 20%, 40% and 60%, have been put under the consideration in order to determine the optimal capital structure, which tends to minimize the shareholders’ value. Among the three different scenarios, the highest earnings per share of $3.31 is generated by the company with a 40% debt to equity ratio. (See Appendix 1) Similarly, the highest dividends per share of $0.99 is generated under the same scenario. At 40% debt level, the company’s ability to pay for its interest expenses is greater than the ability at 60% level, as represented by the interest coverage ratio of 11.82 at 40% debt and 4.52 at 60% debt.

Additionally, the WACC and the share values calculated, are different debt to equity levels (See Appendix 2). First of all, the WACC is determined by taking the undelivered bet through PepsiCo and using the levered beta in different scenarios. The WACC estimation shows that:at 40% debt; the company earns 1.955% return on equity, while the cost of debt is 4.4%. At 20% debt; the cost is lower and the return on equity is higher, but it does not generate higher EPS and DPS for the shareholders, hence the objective of maximizing the shareholders’ value is not achieved at 20% level.Moreover, the value per share is determined at each level of debt, according to which, the value per share is $817.6 at 20% debt, $403.8 at 40% and $144.14 at 60% level. These all value are greater than the repurchase prices at $47.92, $50 and 52.09, respectively.

Recommendation

The analysis confirms that the company should use debt financing in order to achieve its objectives. The company must use a debt to equity ratio of 40%, a sit is giving a greater share value than the repurchase and it is providing the highest earnings per share and dividends per share. The 60% debt structure is not relevant as it does not increase the shareholders’ value compared to the share value provided by the 40% debt level. Similarly, 20% debt level is not good, as it does not generate higher earnings per share and dividend per share..........................

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HILL COUNTRY SNACK FOODS CO. Harvard Case Solution & Analysis