HillCountrySnackFoodsCo.edited1.docx

Hill Country Snack Foods Co – Case Study

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Hill Country Snack Foods Co – Case Study

Deciding on the composition of a company’s capital structure is a very important decision that needs to be properly analyzed. The company’s capital structure is either made up of equity, owners invested capital, or debt; borrowed money from the lender. Hill Country Snack Foods Co needs to include some debt in its capital structure for several reasons.
Using debt to finance the business help the business to maintain the ownership of the company. Ownership of the company is very important as it allows one to make the critical decisions that affect the company. When the company finances itself from equity, it gives away its ownership to other people, which means they can exercise control over the company. On the contrary, when the company gets finances in the form of debt, it helps to safeguard the company owners as the lenders of finances to the company to not gain the ownership of the company; hence the original owner retains the company ownership to themselves but still acquire the necessary finances to run the business. Therefore, Hill Country Snack Foods Co needs to acquire some debt to help the company run properly without giving out its ownership to the outsiders.
Acquiring some debt for the Hill Country Snack Foods Co is very important as it helps the company enjoy a tax deduction. When the business is financed through debt, they are charged interests that are allowable for taxation. When Hill Country Snack Foods Co-financed itself through debt, it enjoys this tax deduction which helps the company spend less on taxes. This is beneficial to equity financing, where all finances which are acquired through equity financing are taxable. When Hill Country Snack Foods Co acquires finance from equity, it does not enjoy tax deduction; instead, it receives more taxation.
Debt financing is important as it helps the owner to enjoy the profits of the company. When a company gets the finances from the lender in the form of debt, the company agrees to be paying the lender within the agreed terms and conditions of the contract. The lenders have no interest in the company’s profits and do not receive any share of it either. This ensures that only shareholders enjoy the profits of the company. When Hill Country Snack Foods Co acquires finances from debt, the company retains the same number of shareholders of the company; hence when the company makes higher profits, shareholders of the company receive more dividends from the company.
Financing the business through debt is very important to the business as it allows the business to expand itself without diluting the company’s ownership. The finances received from debt are used to improve Hill Country Snack Foods Co as the company can invest in improving the company’s infrastructure without necessarily giving out the company’s ownership. Debt financing is also necessary as it helps Hill Country Snack Foods Co to budget for the finances that the company can receive as the company can approximate the number of finances that it is about to receive from lenders. This is not the case in equity financing as the amount to be raised cannot be estimated with accuracy as the amount raised depends on the number of shares which will be purchased in the market.
Hill Country Snack Foods Co acquires debt to finance itself. The company must maintain a healthy debt-to-equity ratio level to not struggle to pay debt interests.

References

Cole, R. A., & Sokolyk, T. (2018). Debt financing, survival, and growth of start-up firms. Journal of Corporate Finance, 50, 609-625.
Slavec, A., & Prodan, I. (2012). The influence of entrepreneur’s characteristics on small manufacturing firm debt financing. Journal for East European Management Studies, 104-130.
Wardani, M. K., & Damayanti, S. M. (2017). Debt or equity? Optimal capital structure in Indonesia’s construction sector companies listed in Indonesia stock exchange (IDX). International Journal of Monetary Economics and Finance, 10(3-4), 235-249.