Outline


Case Background
Analysis
 Key Facts
 Evaluation of financial performance
 Organizational culture and policy
 Recapitalization, WACC, financial
information
Conclusion
 Recommendation
 Case Background

Hill Country Snack Foods Company
produces a variety of snacks including pita
chips, crackers, frozen treats, traditional
snacks etc.,.
Company growth strategy is supported by a
conservative capital structure focusing on:
Quality products
Efficiency
Optimal location
 Key Case Facts

Features of Hill Country’s a conservative
capital structure with:
Debt levels 0%
Return on equity 12%
Cash balances 18% of assets
Market capitalization 13%
Hill Country’s Financial
Performance

Comparing Hill Country with
Market Competitors

 Disadvantages of
Conservative Capital Policy

Idle cash
• Hill Country has the highest cash asset ratio
at 18.48%, while Snyder’s Lace and Pepsi’s
ratios are 1.42% and 5.58% respectively
Hill Country's Cash ratio
20.00%

15.00%

10.00%
Cash ratio
5.00%

0.00%
2006 2007 2008 2009 2010 2011
 Disadvantages Cont.,

Lower growth rate
Company avoids lucrative high risk
businesses that can lead to higher returns
and income growth.
Compounded annual growth rate
significantly less than Synder’s a smaller
company.
 Disadvantages Cont.,

High opportunity cost for holding excessive
cash
Short-term interest rates 0.17%
Yield on 10 year maturity AAA bond 2.5%
 Influence of Organizational
Culture on Capital Structure

Management and leadership style
Keener, Hill Country’s CEO over the last
15 years, main principle is maximization of
shareholder’s value
Managers own 5.65 million shares in the
company and abide by the same principle
 Influence of Organizational
Cont.,

Risk aversion
 Careful selection of investment opportunities
 Focus on low risk projects like acquisition of small
specialty firms and product extension
 Constant profitability growth
Cost Control
 Control unfavorable variances to maintain healthy
cash balances
 Need for Change?

Analysts and shareholders want the
management to move from conservative to
aggressive capital structure through debt.
Reason: Debt financing is critical for the
company’s growth in the market.
 Advantages of Leveraged
Capital Structure

Debt financing is cheaper than equity
financing
Enjoy tax benefit of allowable interest
expenses
Maintain control over the company by limiting
sale of new shares and repurchase of
treasury stock
Facilitate optimal utilization of cash
Recapitalization Alternatives

 Calculate WACC

 Cost of Equity
Re=Ru+ (Ru-Rd)*D/E*(1-Tax)
 WACC= WACC= (1-t)rD (D/V)+ rE (E/V)
Where:
Ru=Return on Equity
Rd=Cost of debt
D=Debt
E=Equity
 WACC

Capital Re E/V rD D/V WACC
Structure
100% 12% 100% 12%
equity
20% Debt 13.48% 80% 2.85% 20% 11.15%
to capital
40% Debt 15.27% 60% 4.4% 40% 10.30%
to capital
60% Debt 16.16% 40% 7.7% 60% 9.44%
to capital
Alternative Capital Structure

 Find Out Optimal Capital
Structure?

 Consider the following metrics:
 Decision

40% Debt-to-Capital is the optimal capital
structure
Reasons:
Maximizes shareholder’s wealth as it has
the highest DPS
Moderate business risk lying in between
the other two alternatives
Adequate interest coverage ratio
 Recommendation

 Hill Country Snack Food should adopt leveraged
capital structure for business growth and
performance
 
Thank You
Q\A