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(A) How much business risk does Hill Country face? (B) How much financial risk would the company face at each of the three-alternative debt-to-capital ratios
(A) How much business risk does Hill Country face?
(B) How much financial risk would the company face at each of the three-alternative debt-to-capital ratios presented in the exhibit below. (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM)
Pro Forma 2011 Financial Information for Alternative Capital Structures | Pro Forma 2011 for | |||
(in million except for per share data and financial ratios) | Actual | 20% | 40% | 60% |
2011 | Debt-to-Capital | Debt-to-Capital | Debt-to-Capital | |
Sales | $1,364.6 | $1,364.6 | $1,364.6 | $1,364.6 |
Operating income (EBIT) | $151.3 | $151.3 | $151.3 | $151.3 |
Interest Expense | $0.0 | $4.1 | $12.8 | $33.5 |
Income before income taxes | $151.3 | $147.2 | $138.5 | $117.8 |
Income taxes | $53.7 | $52.3 | $49.2 | $41.8 |
Net income | $97.6 | $94.9 | $89.3 | $76.0 |
Dividends paid to common stockholders | $28.8 | $28.5 | $26.8 | $22.8 |
Common shares outstanding | 33,883,400 | 29,709,777 | 26,983,400 | 24,476,604 |
Earnings per share | $2.88 | $3.19 | $3.31 | $3.11 |
Dividends per share | $0.85 | $0.96 | $0.99 | $0.93 |
Interest coverage ratio (times) | n/a | 36.90 | 11.82 | 4.52 |
Debt | $0.0 | $145.0 | $290.0 | $435.0 |
Owners equity (book value) | $780.1 | $580.1 | $435.1 | $290.1 |
(C) How much value could Hill Country create for its shareholders at each of the three alternative debt levels?
(D) What debt-to-capital structure would you recommend as optimal for Hill Country Snack Foods?
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