For the business risk, market is shared by competitors like PepsiCo and Snyder’s-Lance. In this high rivalry industry, company could not succeed by price increase. And unfavourable cost due to both internal and external factors is not easy to control. For the financial risk, the more debt financed the higher financial risk it is. In this case, the company operating strategy allowed it to increase market share by good products and decrease the cost and sustain competitive price by efficient and low-cost operation. In order to have more control power of the company and decrease the risk, the company only extend existing products and acquire smaller specialty companies and all funds are equity financed with no debts. Hence, has no financial risk and interest cost.
However, it is questionable that does this zero debt capital structure really maximize the shareholders’ value. Think about what benefits company can get from debts. The implications of Miller and Modigliani’s (1963) proposition 3 suggested that, in the world with tax, company could benefit from gearing-up. The higher the leverage the more tax relief it obtains and the smaller its tax liability becomes.