Assignment for Corporate Finance
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 quick reaction to customer requirements. From these reasons, Hill Country has few risks. However, analyst and experts present that Hill Country’s excess liquidity with zero debt is going to lose benefit and fail to maximize the shareholder value. Risk may be hided in the steady company’s good performance. Pending retirement of CEO is one of risks. ii) Briefly discuss the current corporate culture
Hill Country was a well-managed company with decisions which can make shareholder value. CEO and other management insiders also held a significant proportion of company’s common stock. It means that they have responsibility as employee and owner. Company also has strong commitment to efficiency and controlling costs. These are great power to survive in highly competitive markets. Another important of Hill Country’s culture and managerial philosophy was caution and risk aversion. From that reason they choose zero debt financing and fund internally hold large cash balances. From the discussion of our team members, some of members think that it is too risk aversion position. Only efficiency will be stuck in near future so they should invest somewhat risky project and raise the debt. The others think that it is unique and fresh and in snack and food industry, it may be good strategy and philosophy like Coca-Cola’s permanence. iii) How does the stock market evaluate Hill Country’s current situation compared to its peers in the same industry (base your discussion on the valuation in the stock market) As shown in Exhibit 2, we can easily check the financial status of Hill Country with two competitors. In comparison to Snyder’s, a company with a little larger sales, and Pepsi, a company with 47x more sales, Hill Country performs well given its size. Hill Country has 3.5 times more NI than Snyder’s. However market capitalization of Hill Country is 1,412 mil USD which is lower than Snyder’s 1,517 mil USD. Market doesn’t think that Hill Country has lower value which expresses future expectation. This could be a result due to its capital structure and risk aversion strategy. P/E ratio also shows the same judgment. In the part of book value of asset, Hill Country’s ROA is higher than Pepsi’s ROA. However Hill Country’s ROE is lower than Pepsi’s because of debt. This is another indication of market evaluation. iv) Discuss how much financial risk the company would face at each of the three alternative debt-to-capital ratios presented in case Exhibit 4(you may discuss based on the financial risk faced by firms with different credit ratings); As the debt-to-capital ratios increases, the possibility of bankruptcy and cost of financial distress increase. In the case of Hill Country Snack Foods, Co., the credit rating will be downgraded1 and interest rate will increase according to the increased level of debt. Interest coverage ratio which measures company's ability to honor its debt payments also decrease dramatically as quality of debt increase. Impact on net income from changing in EBIT will increase and financing flexibility will get worsen with the increased level of debt. It also can lose chance to time the market if it has more debts as it has little buffer to issue new debt.
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