Hill Country Snack Foods Co. The Chief Executive Officer of Hill Country Snack Foods had never enjoyed analyst conference calls, but in late January of 2012, Howard Keener was yet again asked about...

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Answered Same DayDec 21, 2021

Answer To: Hill Country Snack Foods Co. The Chief Executive Officer of Hill Country Snack Foods had never...

Robert answered on Dec 21 2021
133 Votes
Ans: 1:-
The various business risks that the company is facing now are as follows:-
Business Environment

These are the risk because of intensive competition in the industry. Country capital is
having competition with big fellow like Pepsi Co. and all and any change in price;
demand et
c. will deeply hurt its bottom-line since margin is very thin.
Competition Risk

The competition is intense with presence of big players like Pepsi with great product
portfolio and low business risk. Hence, competition might eat away the profitability of
the business.
Economic Risk

The condition of US economy is not very encouraging which in turn will decrease the
demand and profitability of the company.
Operational risk
The whole profit of the company depends on the operational efficiency of the company.
Any change in operational cost will directly affect the bottom-line since the margin is
very thin here.
In order to analyse the financial risk, lets calculate the risk first
Actual 20% 40% 60%
Sales 1364.6 1364.6 1364.6 1364.6
EBIT 151.3 151.3 151.3 151.3
Interest Expense 0 4.31205 12.8 33.5
PBT 151.3 146.988 138.5 117.8
Income taxes 53.7115 52.18072 49.1675 41.819
Net Income 97.5885 94.80723 89.3325 75.981
Dividends 29.27655 28.44217 26.79975 22.7943
Common Shares outstanding 33883400 29709777 26983400 24476604
EPS 2.880127 3.191112 3.310647 3.10423
DPS 0.864038 0.957334 0.993194 0.931269
Interest Coverage ratio NA 35.08772 11.82031 4.516418
The above data is calculated using assumption as shown in the table below:-
Dividends 30%
Corporate
tax 0.355
D/C Ratio Interest rate
Bond
rating
20% AAA 2.85%
40% BBB 4.40%
60% B 7.70%
The sales and EBIT is taken from exhibit 4, then we calculate interest and the tax rate is
calculated as per the above table. Finally we take the no. of shares from the exhibit 4 to
calculate EPS and DPS.
The financial risk that the company faces in each of the three scenarios which we will extract
from the above calculation are as follows:-
Scenario 1
At 20 % debt to equity ratio, the financial risk facing by organization is very low since it
maintains a healthy interest coverage ratio of 36.9 which shows that firm can easily
handle any downturn type scenario.
Scenario 2
At 40 % debt to equity ratio, the financial risk facing by organization is medium since it
maintains a decreasing interest coverage ratio of 11.82 which shows that risk of default
against debt is higher in case economic downturn and any other such scenarios.
Scenario 3
At 60 % debt to equity ratio, the financial risk facing by organization is highest since the
interest coverage ratio is lowest in this case which shows that risk of default against debt
is highest in case economic downturn and any other such scenarios.
Graph Explanation
From the graph also, it is clear that with increase in debt the interest coverage ratio
decreases and at the same time...
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