Hill County Snack Foods Co.
Autor: Rohit Kumar Singh • September 23, 2016 • Course Note • 580 Words (3 Pages) • 930 Views
Hill County Snack Foods Co.
Executive Summary
Howard Keener, the CEO of Hill County Snack Foods Co., was asked about the company’s cash balances, capital structure, and performance measures in an analyst conference in late January 2012. Hill County’s growing cash position, absence of debt finance, and large equity balance made it difficult for a company in a mature industry to earn a high rate of return on equity. It needed a more aggressive capital structure. The company had seen its sales and profit grow steadily under Keener and at the end of 2011 the company had zero debt and cash balances equal to 18% of total assets and 13% of market capitalization. Howard Keener was approaching retirement and this created speculation that the company might change to a more aggressive capital structure in the near future.
All decisions in the company were made according to one criterion: will this action build shareholder value? This singular focus came from the CEO, Keener. The management held one sixth of the shares 33.9 million shares outstanding and thus this had personal benefits for the management team as well. The company made forays into new capacity and products but it tended to avoid high risk investments. The CEO had a strong inclination for equity finance and avoided debt finance and the investments were funded internally.
Its two main competitors, PepsiCo and Snyder utilised debt finance. Eg: PepsiCo’s debt to capital ratio was 49.6% and it earned a rating of “Aa” from Moody’s and “A” from S&P. Debt was less expensive than equity and interest payments were deductible for income tax calculations. A Pro forma analysis was presented for three alternative capital structures – 20%, 40% and 60% debt to capital. For each case, debt was to be issued and $55 million in excess cash was to be used to repurchase common stock (currently valued at $41.67 per share).
Facts
Some financial information is given below: ($ in millions)
Sales | $1364.6 |
EBIT | $151.3 |
Interest Expense | $0 |
Income before taxes | $151.3 |
Income taxes | $53.7 |
Net Income | $97.59 |
Earnings per share | $2.88 |
Dividends per share | $0.85 |
Cash and cash equivalents | $181.1 |
Total assets | $979.9 |
Owner's Equity | $780.1 |
Shares outstanding | 33.88 |
Annual Growth of sales | 8.20% |
Annual Growth of EPS | 22% |
Dividend Pay-out ratio | 29.5 |
Net Profit Margin | 7.20% |
Return of Assets | 10% |
Return on Equity | 12.50% |
Problems Identified
Given the Pro Forma 2011 Financial Information for alternative capital structure as well as the current financial structure, we need to find out what would be the optimal capital structure for Hill County Snack Foods Co. and how large are the pay-offs associated with a change in more leveraged capital structure.
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