Hill Country Essay
Whether to change to a more aggressive capital strategy and what is the optimal level of debt-to-capital ratio for Hill Country is the key issue in this case. * Hill Country’s operation strategy and its corporate culture
The company commits to operating and cost efficiency with high quality products and strong distribution management. This strategy enjoys a steady sales growth rate and positive profits.
The management of Hill Country …show more content…
The disadvantage of levered capital structure is the uncertainty of financial risk. The possibility of bankruptcy is higher with higher financial leverage. However, given Hill Country’s risk-aversion operation strategy, the risk is limited.
* The suggested optimal capital structure
The suggested optimal capital structure using Pro Forma in 2011 Exhibit 4 is the 20% debt to capital ratio which has the maximized capital value and minimized cost of capital. (Table 2) The additive assumptions of WACC and firm value using Pro Forma Exhibit 4 are as follows: 1. The MRP in USA in 2011 is 5%. 2. The sales growth rate of Hill Country will average at 6%
* Key problems taken into consideration 1. Personal preference has a substantial influence on whether the company will implement the aggressive capital structure. It’s quite unrealistic to carry out debt finance immediately especially before the retirement of current CEO Keener. And there is question mark on the successor’s preference as well. 2. The uncertainty cost control. The management didn’t always have a solution to keep the costs under control and may expose to higher business risk and financial risk under higher financial leverage.
3. The assumption in Exhibit 5 used 2.85% as the cost of debt for 20% debt-to-capital ratio. Given Hill Country’s blank crediting history and lower interest coverage (36.9% in assumption)