Hill Country Snack Foods

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Case Write Up Hill Country Snack Foods In January of 2012 the CEO of Hill Country Snack Foods, Howard Keener, needed to evaluate the possible benefits of debt financing to find the optimal capital structure for the company. Keener prided himself on making all decisions based on one criterion: will this action build shareholder value? Hill Country also maintained a strong commitment to efficiency and controlling costs. This was necessary to maintain profit margins in the competitive environment where price increases could not be relied upon. Traditionally Hill Country was a slow growth company that used cautious risk – averting strategies to grow the company. Under Keener’s direction, Hill Country had become a profitable company that investors thought highly of. Excluding the data from 2007 and 2008 Hill Country saw an increase in sales and net income due to their efficient operations. An important consideration for this case is the low interest rate set by the Federal Reserve. If interest rates remain at the level they currently are, then a capital structure with debt financing would be a good option. However I believe that the Federal Reserve cannot keep the interest rates as low as they are now for much longer and that we will see interest rates rise in the near future. When this happens the market value of the corporate bonds will be less for investors. We will see a shift from debt financing for companies back to equity financing because investors will gain a better return. With debt financing, the company has an obligation to make periodical coupon payments and ultimately pay back the face value of the bond at expiration. With equity financing there is no obligation to pay dividends or buy back the stocks at a certain time. Thus, with exclusively using equity financing there is less risk and more flexibility than with debt financing. I

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