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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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