Hill Country Snack Foods Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Hill Country Snack Foods Corporation Case Solution

Introduction

Hill Country Snack Food is an American base company which is in Austin, Taxes. I t is well known for the quality production of the snacks and they manufactured a variety of traditional snacks which attract the customers. It distributes its products in various areas all around the country at the convenience stores, superstores, markets and many distribution outlets. Because of its unique identification regarding its quality production, its market value increases day by day and become enough successful to keep its market value.

Question no. 1

What debt-to-capital ratio would you recommend as optimal for Hill Country Snack Foods? Why?

At present, the company has three alternative options that it can implement for its financing. All three alternatives have different debt to capital ratio and the company needs to determine the optimal ratios out of these three.

The first alternative that the company has is to finance at the debt to capital ratio of 20pc Implementing this ratio would cause the interest expenses of the company to be increased by 4.1 dollars per share. However, this ratio would reduce the tax level of the company from $53.7to $52.3.

In the second alternative, the company has the option to finance with 40pc debt to capital ratio. This ratio would increase the interest expenses by 12.8 dollars per share. The ratio would also decrease the tax level of the company to 49.2 dollars.

Last, the company has the option to finance with 60pc debt to capital ratio, which would increase its interest expenses by 33.5 dollars per share and the taxes would be reduced to 41.8 dollars. This option would provide the maximum tax savings to the company with increased leverage, however, because of it, the interest expense would also be increased at higher extent.

Based on the above analysis, the best financing option that could be recommended to the company is the second option, with 40pc debt to capital ratio. This ratio is recommended because although, it would not provide the company optimal tax savings butit would not increase the level of financial distress of the company in terms of interest expense at its maximum. Which holds significantimportance in the financing decision of any company.

Question no. 2:

What are the advantages of adding debt to the capital structure? How issuing debt would affect the company’s taxes and expected costs of financial distress? How would the financial markets react if the company increased its financial leverage?

There are various benefits related to the debt financing. The foremost advantage of the debt financing is that with increased debt level that company couldget optimal tax savings. Besides that, the size of the company’s capital structure would also be increased with debt financing. But along with this, because of increased debt levels, the company would be subjected to high interest expenses. Apart from this, there are several benefits of adding debt to the capital structure, which are as under:

Administration and operation of the company become easy
Ownership control
Reduction in cost
The profit of the company will be retain
Financial leverage

It is important for a company to provide interest rates more than the market return for the subscription of bond issuance while in case of the interested payments the company may issue on don premium. According to the financial market or stock market if the finance debt of the company increase it is the positive sign for the company because in this case investors predict that the company have ability to pay the annual interest and the loans while if there is a reduction in aggressive capital structure than there may chance of demand for higher rate of returns which reduce the confidence of the shareholders,

Question #3:

What methods could Hill Country used to increase debt and decrease equity? How would you convince Keener to adopt your debt-to-capital ratio recommendation?

There are several methods that can be used by a company to increase debt and reduce equity, but is important to understand the aggressive capital structure, so the increase in the leverage ratio by increasing the debt or reducing the equity. Companies always reduce share capital and make a circulation capital to the shareholder to enhance the shareholder value by improving the ROE and for the achievement of the efficient capital structure.

Here are the strong recommendations and methods which Hill Country should adopt for the aggressive capital structure.

Implementation of debt financing

It is necessary for Hill Country to seek-out the capital by issuing the bonds and stop having loans from the banks because by issuing the bonds company made a great benefit and the economic health of the company may be raised furthermore the terms and conditions of bank loan can affect the company economical health while a case of issuing bond it may keenly established the interest and the plan the outgoings on the bases of the current market settings. So it is highly recombinant for the company to issue bonds rather than bank loans.

Decrease of equity through Bonds.

I suggested that Hill Country should decrease their share capital it is because the reduction in equity makes possible share payments by raising the distributable capitals. There are various methods and mechanisms which can be helpful for a company like share buyback, based on which company may buy own shares back in the market. However, if the market become unsuitable for the company, then the company can resell them company can convert there no distributable reserves and share capital into the debt capital where this method is used by various company to become suitable and overcome the market pressure where the company’s existing shares are canceled or replaced by the new shares or as other assets like bonds, which allow the shareholders to receive their capital gain. While the non-distributable assets may be converted into the distributable assets.

Cross Safeties besides financing by debt or equity:

The Hybrid securities play as exchangeable bonds which may change the capital structure as well as it provide the flexible management. When the share price become decrease, then these convertible bonds contribute to the total debt amount and play an important role in the raised of the leverage ratio. While in case if the stock price is raised, then these bonds may resultant in switching to the equity.

Off-Balance Sheet Financing

As we know, OBF helps in keeping the low ratios of both debt to equity and leverage, which results in the prevention of covenants from being breached and low-cost borrowing.If the leverage ratio of the company raised then there will be a high risk for company while the OBF methods like Leasing and factoring may enhance the cash-flow of the company and aid in build up the leverage without the addition to the amount of the debt.

Conclusion and recommendation

High leverage make company more risky, which may increase the concerns of the shareholder, so that is why the high leverage is not good for the economic health of a company, so the balance capital structure is better for the company to be suitable. While debt has a positive impact on taxes, since company would have tax benefits. Hill Country may issue debt with embedded options such as callable bonds, enabling the firm to buy back the bonds at the certain price when the debt-financing is unfavorable.

Other than that company should avoid to take loans from the bank despite loan it is better to issue the bonds, furthermore company maintain their marketing strategies which may helpful in achieving their goals and company become more strengthen then their rivals.

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Hill Country Snack Foods Corporation Harvard Case Solution & Analysis