|Type of paper:||Case study|
|Categories:||Company Debt Financial management Leadership style|
Hill Country is a company that manufactures, distributes, and markets a variety of snacks such as frozen treats, pretzels, and salsa. The company is known for its efficiency in operations, quality products, strong market position in highly growing areas, and its extension to the entertainment industries through the sale of snacks. However, the company has a growing cash position, absence of debts, and large equity balance, which makes it difficult for the firm to earn a high rate of return on equity. Thus, the organization ought to develop an aggressive capital structure to improve the returns on equity. Although the company enjoys a steady rate of profit growth, investors and analysts need to know the optimal capital structure of the company and the amount of payoffs expected from the change to a more influential capital structure. The capital structure theory is a systematic approach to financing business operations by combining both the liabilities and equities. An optimal capital structure suggests that the cost of capital is at minimum at a certain ratio of debt and equity, and the organizational value is at maximum. The analysis identifies problems within Hill Country and suggests solutions that might help the organization to implement aggressive and optimal capital structure to improve the returns on equity.
The established culture in Hill Country Co. places much focus on shareholder value. This criterion of making decision aims to benefit the management team, who are the internal investors. Placing much emphasis on the growth of shareholder's value leads to an accumulation of liquid finances, which minimizes the asset growth of the company. As studied in the introductory lecture of corporate finance, financing decisions influence the value of the firm. Since most of the company's funds are directed to the shareholders, the company lacks the benefits associated with debts and equities, meaning that the operational cost of the firm is higher. Therefore, the firm should adopt a policy that concentrates on improving the value of the company through debts and equity, which helps to maximize the value of the organization (Andren 2019, p. 4).
The company also believes in risk-avoidance while making its financial decision. This belief has led to investments in attractive opportunities that require lower-risk bets. However, this method of investment denies the company an opportunity to invest in a series of small but successful products that are cost-efficient and beneficial in improving the operating profits. Due to this cautiousness, the organization prefers equity finance against debt finance, which leads to internal investments. Thus, the interest rate earned on invested cash remained at 0% (Kester and Stephenson 2012, p. 3). Additionally, the return on equity reduces due to the avoidance of debt and total dependence on equity capital. According to the analysis shown in the case study, PepsiCo and Snyder's Lance shows a high debt-to-capital ratio, which provided about 25% of investment capital and strong interest coverage (Kester and Stephenson 2012, p. 3). Therefore, Hill Country's management should use debt finance in investments to ensure a low-level business since equity finance is more expensive than debt finances.
In conclusion, Hill Country Co. should adopt a policy that concentrates on improving the value of the company through debts and equity, which helps to maximize the value of the organization. This can be done by shifting the focus of value from internal shareholders to external investors, which reduces the operational cost, increasing the total income. Moreover, the organization believes in risk-avoidance, which leads to internal investments and equity financing. Debt financing is considered less expensive than equity financing. Debt finances improve the interest coverage rate and the risk associated with firm's investment. Therefore, Hill Country should consider the above changes within its operations to encourage investors and attain lower operation and investment costs.
Andren, N., 2019. 'Optimizing the capital structure.' Lund University School of Economics and Management. Pp. 3-8.
Kester, W.K. and Stephenson, C., 2012. 'Brief Cases: Hill Country Snack Foods Co.' Havard Business School. Pp. 1-8.
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