Hill County

Table of Contents

1. Business Risk of Hill County and Financial Risk of the Three Alternative Debt-to-capital Ratios (Question 1) 3

Business Risk 3

Financial Risk 4

2. Recommendation of Optimal Leverage Level and Impact on Increasing Its Financial Leverage. (Question 2) 7

3. More Aggressive Capital Structure and Methods. (Question 3) 9

4. Recommendation Associates with its Corporate Culture. (Question 4) 11

Reference: 13

Appendix I: Question 1 & 2 Calculation Draft 14

Appendix II : Exhibits 16

1. Business Risk of Hill County and Financial Risk of the Three Alternative Debt-to-capital Ratios (Question 1)

1.1 Business Risk

The business risk of Hill County can be interpreted as following:

Table 1: Business Risk and the Risk Level.

Number | Business Risk | Details | Risk Level |

| | | |

A | Sales grow at steady rate | 1.       Exhibit 1 Sales figure increasing | Low |

| | 2.       Extensions of existing products and acquisition of smaller specialty companies | |

B | Cost efficiency and controlling costs | One of corporate culture | Low |

| | | |

C | The firm is growth and success | Efficient operation, quality products, strong position in good economic climate, ability to expand and customer focus. | Low |

D | Risk aversion avoided great leaps combined with operating and cost efficiency. | One of corporate culture | Low |

| However, Risk avoidance in financing decisions. | i.e. zero debt and CEO’s strong preferences | High |

E | Strong financial results were produced by combination of good products, efficient and low-cost operations and all-equity funding. | Results in Exhibit 1. Steady increasing in sales, net income, cash, dividends, profit and etc. | Low |

| However, business risk in 2007 and 2008 was increasing because of financial crisis | Results in Exhibit 1 for 2007 and 2008, cash and net profit decreased for difficult economic years. | High |

F | Sufficient cash flow and...