Hill Country Snack Foods Co Case Solution

2. Current Financial Performance

Company showed strong financial results through the combination of the efficient and low costs operations and all equity financing. It has high cash flow and paid regular dividends. But as the company has huge cash and capital structure without debt, it showed very low returns. Return on Assets and return on equity were quite low due to low returns, high assets and complete reliance on equity. Reduced cash increased debt financing and reduced equity financing can bring great returns. Hence, company is paying huge opportunity cost by having low returns on equity due to current capital structure. Company needs to have an aggressive capital structure by adding debt to its capital structure as this would increase the stock price and market value of the company by sending a positive signal to the market. Hence, shareholder would benefit a lot from this change.

3. Comparison of Financial Performance with the Industry

Competitors of the company carried high debt to capital ratios while Hill Country was totally dependent on equity financing. Both Snyder and PepsiCo, Inc. had very high annual growth rate of sales, in contrast to Hill Country. Net Profit of the company is 7.2%, keeping in view the efficient, and low cost structure while that of Snyder is 2.3% and PepsiCo 9.7%. Return on equity of Pepsi was 30.8% while that of Hill Country was 12.5%. P/E ratio of the both companies was also quite higher than Hill Country. Stock price of PepsiCo is $66.35 per share while the stock price of Hill Country is $41.67 per share. By having, debt structure, share price of the company and P/E ratio would increase due to positive evaluation of the investment community, to make these measures more competitive to PepsiCo and the industry. Return on equity would also increase making it more comparable to the giants in the industry.

4. Alternative Capital Structures and Optimal Debt to Capital Ratio

In Exhibit 4, there are Pro Forma Statements for Hill Country based on three different scenarios of Capital structure i.e. 20%, 40%, 60% debt to capital ratio. Earnings per Share in the case of 40% debt is higher than other two scenarios. Dividend per share of $0.99 in this case is also higher than other two cases. High dividend per share indicated that the company shows positive prospects and hence its market value would increase due to high stock prices. Interest coverage ratio of 36.90 in case of 20% Debt to Capital explains that company again has huge liquidity and debt to capital ratio must be increased. In case of 60% debt to capital, interest coverage ratio is 4.52 which show that the company might be in a difficult situation to pay its debt. If we look at the industry interest coverage ratios, interest coverage ratio of Snyder’s Lance, Inc. is 6.67, and that of PepsiCo, Inc. is 11.25. So, interest coverage ratio of 11.82 in case of 40% debt to capital can be optimal.