Hill Country Snack Foods Co.

By: W. Carl Kester and Craig Stephenson

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Synopsis: Hill Country Snack Foods, located in Austin, Texas, manufactures, markets, and distributes snack foods and frozen treats. The CEO is passionate about maximizing shareholder value and believes in keeping tight control over costs and operating the business as efficiently as possible. The company invests in additional capacity and new products only when attractive, low-risk opportunities are identified and can be funded internally. The firm's culture of risk aversion extends to financing decisions with a clear preference for equity finance over debt finance. The CEO believes a strong balance sheet with large cash balances provides the company with maximum safety and flexibility. Sales growth has been steady but unspectacular. As the CEO approaches retirement, investors and analysts speculate that the company will change to a more aggressive capital structure. Students must analyze the firm's current capital structure, explore three alternatives using debt finance, and determine the optimal debt-to-capital ratio.