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Hill Country’s Operating Strategy

Essay by   •  April 25, 2017  •  Case Study  •  631 Words (3 Pages)  •  1,317 Views

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Hill Country’s operating strategy was to produce high quality products through efficient, low-cost, and aggressive operation as well as singular management. In detail, the company provides several kinds of snacks to satisfy different types customers. Strong control of budgets and costs achieve an efficient and low-cost operating. Customers are satisfied by companies’ quick react to their requirement or preferences and reinvent and expand its products, showing the efficient management for the customer requirement. Another aspect of Hill Country’s operating strategy was build shareholder value. Howard Keener, the CEO of Hill Country, had a strong believe that value at Hill Country was a way of life, not just a talking point. His belief may be persuaded by his own significant proportion of one-sixth of the company’s common stock which significantly benefited personal shareholder value.

Snack industry was very competitive, company could not success by increase prices. In this case, efficiency and controlling strategy decrease the firm’s business risk. This strategy reduced input cost and make the firm could not fluctuated by market sale price. However, Hill Country always want to avoid any debt. This strategy eliminates the risk of bankruptcy. However, appropriate percentage of debt can produce interest tax shield. The interest tax shield increases cash flow from asset and the firm’s value. Therefore, Hill Country’s strategy decreases the firm’s total value.

Based on the calculation on Exhibit 4 &5, 40% debt of total asset is the optimal capital structure because it maximized shareholders value and has highest firm value at $2482M. Although 40% debt rated at BBB with 4.4% interest rate and the net income reduces by 8.5%, dividends and earnings per share reach peak in 40% debt, which are $0.99 and $3.31, thus adding value to shareholders. In addition, it allows the firm not to be over leveraged, which is in favor of the firm that it does not want to have too much debt. If Hill Country take 60% debt to capital ratio, the company repurchase the most of the shares comparing with 20% and 40% debt to capital ratio. Also, the debt would be rated as B which has highest interest rate of 7.7% will increase the financial risk.

Hill Country’s conservative capital structure limits the growth of Return on Assets by having an extremely low interest rate earned on invested cash which contributes very little to net income. More cash means more assets. The return on equity is also reduced by avoiding debt. With even a slight reduction to cash, increases to debt, and reductions to owner’s equity would significantly increase ROE. Moreover, adding debt could produce interest tax shield to increase cash flow from asset and to increase the value of the firm. Debt financing allows control of business. Business owner can make decision and does not need consider shareholders or investors. The lender does not share the profits of operating, a firm only need to make repayment. Debt is less expensive than equity due to its contractual nature and priority claim.

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