3. Using the template provided on Canvas Modules, calculate key financial metrics given the three capital structures under study and compare with the most recent year end.

Answer 3 Shareholders value that Hill Country create at each of the three alternative debt levels The goal of Hill Country is to make the firm as valuable as possible and maximize shareholder value. The value Hill Country created for shareholders are the increased price and dividends per share. We can see the dividends per share in Exhibit 4 are $0.96, $0.99, and $0.93 respectively. Also, shareholder value creation can have assessed using EPS. Under all 3 pro forma scenarios, shareholders will experience an increase in shareholder value with EPS increments of 3.19, 3.13 and 3.11 for 20%, 40% and 60% Debt-to-Capital ratios respectively. Furthermore, the stock price increased from $41.67 per share to $47.92 in 20% debt-to capital, $50 in 40% debt-to-capital, and $52.09 in 60% debt-to-capital (Exhibit 5). The increased stock price is the benefit that created by Hill Country for its shareholders. At the end of 2011 the company had zero debt and cash balances equal to 18% of total assets. 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. The advantages of adding debt to the capital structure Based on the case study above, there is three types of debt-to-capital in Exhibit 4. The first one is 20% of debt-to-capital. Second is 40% of debt-to-capital and lastly 60% of debt-tocapital. These three alternative options were put forwarded to opt as a company’s financing strategy. The first option is 20% debt to capital. If the company choose this option, it will increase the interest expenses to $4.1 per share but at the same time, it reduces to tax level from $53.7 to $52.3. The second alternative is 40% debt to capital ratio. If the company use this option, it will increase the interest level to $12.8 per share and subsequently lowers the tax level from $53.7 to $49.2. The last alternative is 60% debt to capital ratio. In this option, it provides the highest tax savings which are $41.8 but increases the interest expense at $33.5. Also, from the three options, we can see that the 40% debt to capital indicates the highest EPS compared to 20% debt to capital and 60% debt to capital. Debt impact the company’s taxes and expected costs of financial distress and the financial markets react if the company increased its financial leverage. From the calculation above, its shows that the third option indicates the highest financial distress for the company as the interest coverage ratio will deteriorate to just 4 times. Therefore, for the better financial distress, the company would recommend the second option as optimal for Hill Country Snack Foods for better interest coverage ratio and well financing. The above alternatives assume that due to additional debt level there is no increase in sales volume which not might be the case. As we know, adding debt to the capital structure for Hill Country will provide more benefits or advantages to increase their capital structure. One of the advantages of adding debt to the capital structure is cost reduction. If the company using debt, it will require lower financing cost to the Hill Country company. Thus, companies always mix debt into their capital structure to lower the average financing cost. Using debt, companies are contractually liable to make repeated interest payments and return debt principal at the maturity date. As a result, debt holders will accept less risk, compared to equity holders, who always have no recourse for their investments if companies drop down. The other advantage of adding debt to the capital structure is tax-deductible. Taxdeductible is a decrease or reduction in tax obligation from a tax payer's gross income or gross profit. If Hill Country company using debt, it helps to lower a company’s taxes because it will allow the interest deductions. Tax rules permit interest payments as expense deductions against revenues to arrive at taxable income. The lower the taxable income, the lower the company pays taxes. On the other hand, dividends paid to equity holders are not tax-deductible and should come from after-tax income or profit. Therefore, tax savings help to diminish a company’s debt financing cost and advantage the equity financing lacks. Issuing debt will impact the company’s taxes and expected costs of financial distress.This is because the increase in debt or equity ratio will increase the probability of the company having bankruptcy. As a result, it will increase the expected bankruptcy costs. The additional value of the interest tax shield will balance by the expected costs of bankruptcy. For example, if Hill Country issuing more debt, the company will be facing a financial problem due to the increase in the cost of bankruptcy. Also, debt holders are legally permitted to interest and the payment of principal. If the company does not pay as promised, creditors can take a legal action which is to sue the company. The ultimate distress faces by the Hill Country is to file for bankruptcy, where ownership of the company's assets such as property will be transferred to debt holders. When Hill Country increased its financial leverage, the financial markets will assume that this company is doing well in their business. This is because it will increase the value EPS and ROE. The investors are attracted to invest in the company. Financial markets will rank the company, but it depends on the risk of the company. The more the company issuing debt, the higher the probability for the company having bankruptcy.