Snack Food Co. Case Study

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HILL COUNTRY SNACK FOODS CO. March 30 2013 This report analyses and estimates the effects of a recommended leveraged of 20%, 40%, and 60% debt-to-capital recapitalization for Hill Country Snack Foods Co. Fundamental conclusions include: • Relevant theories infer that by incorporating debt to a firm’s capital structure, significant tax savings can be made, but financial distress and signaling factors need to be considered. • Hill Country’s Weighted Average Cost in Capital is estimated to decrease after recapitalization. • It revealed that 20% debt-to-capital result is the optimal (lowest) WACC and maximizes the company’s value. • Significant debt issue is a concern as it is risky and in conflict with the company’s culture and managerial of low-risk attitude. Hence, 20% debt-to-capital restructure is recommended as it is not significant amount as opposed to other alternatives. • Other effects, including financial distress, signaling, investment and clientele considerations, are difficult to measure but predictable to balance out to a mildly optimistic set of considerations. • An alternative approach is to increase debt in order to use the proceeds to pay dividends, however it is not recommended. In conclusion, if Hill Country were to engage in the leveraged recapitalization, this report would highly recommend the 20% debt-to-capital ratio be used to repurchase shares. AFF5300 CASE STUDIES IN FINANCE: CASE STUDY 2 Table of Contents 1.0 Introduction 2 2.0 Hill Country Snack Foods Co. 2 3.0 Literature Review 3 3.1 Modigliani and Miller Theorem Capital Structure 3 3.2 Trade-Off Theory 3 3.3 Perking Order Theory 3 4.0 Estimating the Effect of a Leverage Recapitalisation 3 4.1 Impact on Cost of Capital 3 4.2 Assumptions and Limitations 4 4.3 Financial Distress 5 4.4 Signalling 5 4.5 Clientele Effects 6 5.0 Recommendations and conclusions 6

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