UIC Radical Change in The Fir

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 financial
policy. (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, briefly
discuss 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 credit
rating of BBB by S&P. Do you share Dahlgren’s 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 Swedish
Match 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 moves
forward with the transaction. Answer the following:
– What is a good estimate for the cost of debt on the perpetual bond associated with this
transaction? Briefly discuss how you came up with that estimate.
– Based on your estimate for the cost of debt, calculate the annual interest tax shield Swedish
Match 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 moves
forward 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 repurchase
shares, 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 forward
with the transaction or not? Briefly explain your answer

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