Congratulations! You have just been appointed Chief Financial Officer for Hill Country Snack Foods Company and report to Howard Keener, the firm’s CEO. As a first task, Keener has asked you to evaluate the performance of the firm and to make a recommendation about what the firm should do with its large cash balance and whether the firm should increase its leverage by taking on interest-bearing debt. Keener has asked you to specifically consider the following questions:
How much additional financial risk can the firm handle given its business risk?
What debt-to-capital structure would you recommend and how would issuing debt impact the company’s taxes and expected costs of financial distress?
How could a more aggressive capital structure be implemented?
How do you expect the capital markets to react to the implementation of your recommendations?