UIC Radical Change in The Firms Financial Policy Paper

Question Description

I’m working on a finance case study and need an explanation and answer to help me learn.

Question 1 (5 Points)Briefly explain what factors have prompted Swedish Match to consider this radical change in its financialpolicy. (i.e. Why are they considering this now?)

Question 2 (10 Points)Increasing leverage to repurchase shares will likely have benefits as well as costs. Based on the case, brieflydiscuss two potential benefits and two potential costs associated with this transaction.

Question 3 (10 Points)Dahlgren believes that if Swedish Match moves forward with the transaction it would likely receive a creditrating of BBB by S&P. Do you share Dahlgrens view or not? Explain your answer.(Hint: To answer this question, I would like you to calculate some of the metrics in Exhibit 5 for SwedishMatch under the new proposed financial policy.)

Question 4 (15 Points)Assuming that Dahlgren is correct in that Swedish Match will receive a credit rating of BBB if it movesforward with the transaction. Answer the following:- What is a good estimate for the cost of debt on the perpetual bond associated with thistransaction? Briefly discuss how you came up with that estimate.- Based on your estimate for the cost of debt, calculate the annual interest tax shield SwedishMatch would expect to get from issuing the perpetual bond.- Calculate the present value of all future interest tax shields from issuing the perpetual bond.

Question 5 (15 Points)Assuming that Dahlgren is correct in that Swedish Match will receive a credit rating of BBB if it movesforward with the transaction. Answer the following:- What is the enterprise value before and after the transaction?- How many shares will be repurchased and at what price?- What is the share price of Swedish Match before and after the transaction?Please make the following simplifying assumptions to answer this question:- Use 2004 numbers to estimate the enterprise value and share price before the transaction.- Assume that corporate taxes are the only market imperfection.- Assume that shareholders do not anticipate the transaction before it is announced.- Assume that the full proceeds from the perpetual bond issuance will be used to repurchaseshares, and that all repurchases are conducted on the same day.

Question 6 (5 Points)Based on your calculations from Question 5, would you recommend that Swedish Match moves forwardwith the transaction or not? Briefly explain your answer

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