Fundamental of Corporate Finance : Assignment

Added on - 24 Apr 2021

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Fundamental of Corporate Finance: Questions(Author’s name)(Institutional Affiliation)Date
(Insert surname)2Fundamental of Corporate Finance: QuestionsQuestion 1Caution and risk prevention are the main cultural and managerial philosophy of HillCountry Snack Foods. Hill country functions in a very a competitive environment which makesit accessible to its clients. In such a competitive Industry the prices also tend to be verycompetitive[ CITATION Tay16 \l 1033 ]. The main reason for the success of Hill Country is itsprovision of quality products, its locality geographically and efficient operations. Some of therisk faced by the company include macroeconomics conditions and the consumer’s preferencefor healthy foodsTo counter the several risks in the business and ensure maximum shareholder value, thiscompany has evaluated three alternative debt-to-capital ratios. All these ratios offer a taxprotection advantage and thus maximize the company’s value[ CITATION Mou16 \l 1033 ]. Therating of the bond is AAA/AA that indicates low original occurrence of risk. Increasing thelevels of debt will result to huge financial costs. A ratio of 20.0% indicates that it is lower thanits competitors, a ratio of 40.0% indicates that this is goes hand in hand with the level ofcompetitors and does not create any financial risk while a ratio of 60.0% will lead to a highfinancial risk and reduces the rating of the bond to B, having a much higher risk[ CITATIONMou16 \l 1033 ]. When making comparisons of the return of equity, we will be able to estimatethe value of the adjustments in the capital structure. It will be noticed that the return of equitywill tend to rise up when the ratio goes up this shows that 40.0% ratio will increase the value inthe company. The other ratio of 60.0% may not be appropriate as it presents higher risks and adecrease in the value of the company’s worth.
(Insert surname)3Business risk is a risk that occurs on the firm’s assets when there is no usage of debt.Reduction on 20% and 10% on EBIT, decreases net income, lowering EBIT when it’s a 20%debt.
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