Hill Country Case Study
Autor: Alex Lim • May 13, 2016 • Case Study • 400 Words (2 Pages) • 1,353 Views
Week 4 (Hill Country Case Study)
- Hill Country faces significant business risk due to their capital structure with zero debt financing. The excess liquidity could be invested to generate revenue.
Financial risk is briefly assessed using interest coverage ratios – the company only starts facing significant financial risk 60% Debt-to-Capital ratio 4.52. At levels 20% and 40% the company is still able to maintain a healthy coverage ratio at 36.9 and 11.82 respectively, which is still superior to its competitors, Snyder and Pepsi at 6.67 and 11.25 respectively.
Shareholder value creation is assessed using EPS – under all 3 pro forma scenarios shareholders will experience an increase in shareholder value, with EPS increments of 10.76%, 15.93% and 7.99% for 20%, 40% and 60% Debt-to-Capital ratios respectively.
- Currently the company has been structured in a way that generates sufficient operational cash flow to fund both capital investments and dividend payments. This gives a certain degree of freedom for the company to make adjustments without stretching out its account payable (which has been 0 for a while now).
Pushing the Debt-to-Capital ratio to 20% or 40% are both viable options that strengthens company profitability. Obviously, 40% DTC ratio will generate more income, but risk aversion will have to be considered.
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The use of debt financing is attractive due to the lower cost of capital from tax deductibles. The issuing of debt financing reduces debt payments, ultimately leading to greater profits, however this exposes the company to risks such as:
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