Hill Country practices the conservative capital structure, which has excessive liquidity and lower interest rates that will bring negative impacts on the company’s financial performance measures. So, it is a good opportunity for Hill Country to implement a more aggressive capital structure. For example, the Chief Executive Officer (CEO) of this company can increase the leverage ratio by either increase the debt or reduce the equity or both.
At first, debt financing usually used when a firm raises money for capital expenditures by issuing debt instruments to individual or institutional investors. In return for lending the money, the firm need to pay the principal plus interest payment at some agreed time in the future. The most common debt …show more content…
Capital reduction is the process of reducing a firm’s shareholder equity through share repurchases and share cancellations. The reduction of capital method is used if the firm wishes to increase the shareholders’ values and to produce a more efficient capital structure. Hill country can repurchase their shares from the marketplace. A share repurchase not only reduces the number of shares outstanding, it also increases the earnings per share and elevates the market value of the remaining shares in the market. After repurchasing, these shares either will be cancelled or held as treasury shares. It means that these bought-back shares are no longer held publicly. So, I would recommend that Hill Country repurchase some of its shares and cancel it. This is because the purpose of the firm is to reduce the equity shares …show more content…
He also concentrated to maintain his company’s strong balance sheet. So, another alternative that I would recommend for this company is through the off-balance sheet financing (OBF), which is the operating leases. This method can enhance the cash flow of the firm and substantially build up the leverage without adding to the amount of the debt. For example, Hill Country can rent a piece of equipment and buy this equipment at the end of the leases period with minimum purchasing cost. Before this equipment is bought, Hill Country only records the rental expenses for the equipment in the company’s financial statement throughout the years. When the company buy it, then only the amount of asset and liability are recorded. So, the CEO of Hill Country can keep his company’s leverage ratio and debt-to-equity ratios at lower rate. It can avoid that the leverage ratio and riskiness of the company will weaken the strength of balance sheet and periodic