Hill Country Snack Foods Co. Essay examples

1831 Words Oct 25th, 2013 8 Pages
Assignment for Corporate Finance
Assignment

Major
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Group
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Name
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1 i) How much business risk does Hill Country face?
Hill Country Snack Foods Company manufactures, markets, and distributes snack foods and frozen treats throughout the United States. Hill Country is overall well performed company. Sales, Net Income, ROE and ROA had increased at a steady rate. Company mainly focused on maximizing the shareholder value by the CEO and other management’s managerial philosophy. Currently, Hill Country uses a risk adverse strategy to choose their business or project. Hill Country’s industry is high competitive but it kept going well with cost efficiency and
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Our group recommends the second alternative using 40% leverage ratio among three alternatives. ii) Why?
By MM proposition 2 with corporate tax, the result of each WACCs is like bellows : [ Table ] Calculation of cost of capital in each structure

No debt
20% debt
40% debt
60% debt
RE
6.91%
7.57%
7.99%
6.15%
RD
-
2.85%
4.40%
7.70%
RWACC
6.91%
6.42%
5.93%
5.44%
*Equation for Ro = EBIT x (1 - Tc) / Vu = 151.30 x (1-0.35) / 1,141.92(mil)
*Equation for RE = Ro + (1 - Tc) x (Ro - RD) x D/E
*Firm Value (Vu) : Current Market Price $41.67 x Common shares outstanding 33.8844(mil)
From above table, capital structure with 60% debt shows the lowest WACC, 5.44%. With this result, the optimal capital structure may seem to be the use of 60% debt, but we think it’s not optimal in aspect of shareholder’s value and credit rating in market. So, we choose the use of 40% debt with the second lowest WACC as the optimal capital structure.
- Improvement of shareholder’s value : maximum EPS and DPS
At 40% debt-to-capital ratio, company shows the maximum EPS and DPS. Although total amount of net income and dividends decrease, earnings and dividends per one share become maximized by the use of debt. Eventually, stock price is also expected to increase when we consider present break-even PER. In addition, stock repurchase premium (by use of all debts) contributes to some shareholder’s capital gain.
- Maintaining a proper Credit rating in Investment

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