5) Company has hoarded lots of cash with it.

They have mentioned reason for it being it

increases both safety and flexibility. However, that’s am inefficient use of money.  As
mentioned in a case, short term interest rates are very low, for example, 0.17% on one
month CDs. Thus, company is wasting investors’ money by not putting money to its
optimum use. Thus company needs to chalk out plan to put to use that excess cash for
correct usage.

Analysis and assessment

Now Mr. Howard Keener, CEO of the company for last fifteen years, who has is chiefly
behind the current corporate culture of being risk averse and conservative in terms of the
company’s financial structure is due to retire soon, major speculation is that a more
aggressive capital structure might be implemented in the near future. And the major
question under contemplation is “What is the optimal capital structure for Hill Country
Snack Foods, and how large are the payoffs associated with a change to a more leveraged
capital structure”

Thus, in the current assessment we have tried to answer the above question.

Now, first we have tried to calculate Cost of Capital at three different Debt to Capital
Ratios: (1) 0%, (2) 20%, (3) 40%, (4) 60%.

Following data is made use of:

1. Yield to maturity on 10 year maturities: 1.8%

2. At 20% Debt to Capital ratio the assumed bond rating is AAA/AA and the interest
rate is 2.85%, at 40% Debt to Capital ratio the assumed bond rating is BBB and the
interest rate is 4.4%, and at 60% Debt to Capital ratio the assumed bond rating is B
and the interest rate is 7.7%. The debt issued has a maturity of 10 years.
3. The effective income tax rate is 35.5%
Here, for calculation purpose, exhibit 4 is used where Income before income taxes
for 2011 is  given as $151.3 and income taxes is given as $53.7. Thus, effective
income tax percentage is 35.5%