Hill Country Snack Foods Co.

Case Analysis

GROUP A
Karishma Gupta | Kunal Sharma | Prateek Kumar | Puja B
Saikiran | Shivom Kalra | Vishal Wasson
Q.1 .How much financial risk would the company face at each of the
three alternatives given in Exhibit 4. How much value will Hill Snack
create for its shareholder in each of the three alternatives.

We found from Exhibit – 1 ,return on equity is 12.5% in 2011.

Therefore, the WACC is 12.5% with no debt.
 Based on the equation: Re=Ru+(Ru-Rd)*(D/E)*(1-Tc),
At 20% debt, Re is 14.06%, Rd is 2.85%
At 40%debt, Re is 15.98%, Rd is 4.4%
At 60% debt, Re is 17.14%, Rd is 7.7% respectively
The company with no debt has no financial risk.
The financial risks are due to the amount of debt we take.
Increase in financial risks are 1.56%,3.48%, and 4.64% respectively.
The value Hill Country created for shareholders are the increased price and
dividends per share.

We can see the dividends per share are $0.96, $0.99, and $0.93 respectively.

Furthermore, the stock price increased from $41.67 per share to $47.92 (20%
debt), $50 (40% debt), and $52.09 (60% debt). The increased stock price are the
benefit that created by Hill Country for its shareholders.
Q.2 . What debt to capital ratio would you recommend as optimal for
Hill Country Snack Foods?

We recommend 40% debt of total asset is the optimal because it maximized the
shareholders value.

From 20% debt to 40% debt, the stock price increased $2.08. From 40% debt to
60% debt, the stock price increased $2.09. However, Dividends per share reach
peak in 40% debt, which is$0.99.

Also an Interest Coverage Ratio of 11.82 is in line with the industry average and
much higher than the bonds with similar rating (4.1).