Hill Country Snack Foods. Co Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Hill Country Snack Foods. Co Case Solution

Alternative Options

The company has three options for the utilizations of debt and one options needs to be selected. The alternatives with the respective advantages and disadvantages are defined as below

1.Engaging in Faster Expansion

The first alternative for the company is to expand more by utilizing the debt. However, the case determines that the company’s cash position is approximately 18% of the company’s total assets. The key advantage of expanding the business is that the company has a strong cash positions which is quite helpful.However, the company is generating steady revenue and net profitability. The expansion would provide the company with an increased market share and profitability, but it would not resolve the current concerns of the company’s investors which is to maximize the shareholders’ worth. The company would be required to utilize the debt amount in expansion, which further requires a high capital investment, hindering the company’s financial position related issue from being resolved.

2.Performing a Significant Buyout

The buyout refers to acquiring the controlling interest in another company or in simple term it refers to acquisition. The main advantages associated with a significant buyout are that the company will gain access to new technology, products and markets, which could help the company increase its customer base, market share and profitability. However, it would increase the debt as the company would have to bear all the liabilities of the acquired company along with the debt already taken, which will increase the company’s leverage ratio, In addition, it might lead to conflict of interest between the company’s shareholders and the management, as the high level of debt would increase the bankruptcy risk being posed to the company.

3.Buying Back Shares

The company’s buyback of shares is another alternative, which can be utilized using the company’s debt. The shares buyback would ultimately increase the shareholder’s worth by boosting up the company’s key financials. First of all, the inclusion of debt would add up the company’s interest expense, thereby providing tax savings and a higher profitability. An enhanced profitability would lead the company towards having increased return on assets, earnings per share and dividends per share as shown earlier. Lastly, it would reduce the company’s reliance on equity, which is a high cost option as compared to the mixture of debt and equity financing.

Recommendation (Best Alternative)

The recommended option for the company is to buyback the company’s shares, as by doing so, the company’s financial position will improve. The debt can be used to change the company’s capital structure by buying the shares from its shareholders. The company’s capital structure is so conservative that it negatively impacts the company’s financial position. The company’s liquidity position is quite high and the interest rates in the market are low, which indicates that it isa good time for the company to involve debts in its capital structure. Buying back the shares would reduce the company’s equity portion and increasing the debt portion. This would ultimately bring up a higher profitability, as the cost of debt financing is lower than equity financing due to the tax savings brought by the tax deductible interest expenses, with the debt inclusion.............................

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Hill Country Snack Foods. Co Harvard Case Solution & Analysis