What drove an increase in Jones’s accounts receivable and inventory balances in 2005 and 2006? 4. Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?

AF 495 CASE 6 AND 7

CASE6

Accounting & Finance Department AF495 Financial Policy CASE WRITE-UP 6 Instructions: Answer all questions below. Make sure to show your work. Your answers must be typed. (TOTAL = 100 POINTS) Hill Country Snack Foods 1. How much business risk does Hill Country face? How much financial risk would the company face at each of the three alternative debt-to-capital ratios presented in Case Exhibit 4? How much value could Hill Country create for its shareholders at each of each of the three alternative debt levels? 2. What debt-to-capital structure would you recommend as optimal for Hill Country Snack Foods? What are the advantages of adding debt to the capital structure? How would issuing debt impact the company’s taxes and expected costs of financial distress? How would the financial markets react if the company increased its financial leverage? 3. How could Hill Country implement a more aggressive capital structure? What methods could be used to increase debt and decrease equity? 4. Considering Hill Country’s corporate culture, what arguments could you use to persuade CEO Keener or his successor to adopt and implement your recommendation?

CASE 7

CASE WRITE-UP 7 Instructions: Answer all questions below. Make sure to show your work. Your answers must be typed. (TOTAL = 100 POINTS) Jones Electrical Distribution

1. How well is “Jones Electrical Distribution” performing? What must Jones do well to succeed?

2. Why does a business that has profit of $30,000 per year need a bank loan?

3. What drove an increase in Jones’s accounts receivable and inventory balances in 2005 and 2006? 4. Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?

5. When will Jones be able to repay the line of credit? 6. What could Jones do to reduce the size of the line of credit he needs? 7. What are the implications for Jones’ s lifestyle of accepting the new, larger line of credit?