gr-1-team-5-2015

7/23/2019 GR-1-TEAM-5-2015

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Q1. Assuming Swedish Match faces a 28% tax rate on income and can issue bonds at a fixed krona

yield of .!%" how much will the com#any sa$e in taxes for a S& billion reca#itali'ation( )hat isthe $alue of this interest tax shield(

A1. *he com#any will sa$e 28% of the interest #aid i.e. .!% of +illion S&. *he tax

shield would be the total #resent $alue of sa$ings each year discounted at .!%

Q2. )hat will SM,s book $alue balance sheet look like after it com#letes the debt issuance

and share re#urchase(

A2. Swedish Match,s book value balance sheet for the year 2-- #ost the reca#italisation

Assuming that the debt issuance of S& billion was com#letely for the share

re#urchase" the long term debt and hence the total interest bearing debt would

increase by SEK 4000 million. Also" the book value of equity after the share

re#urchase would decrease by SEK 4000 million.

Q/. What will Swedish Match’s market value balance sheet look like:

a. 0ight after it announces the le$eraged reca#(

b. )hen it com#letes the issuance of S& billion in debt(

c. )hen it com#letes the share re#urchase(

A/a. Swedish Match,s market value balance sheet for the year 2-- #ost the

announcement

Assuming market $alue of e3uity as on year end 2-- 488./ #er share 5 S& 28!

million.

*he book $alue of e3uity 5 !-6-

*he com#any has to #ay a #remium when it buys back the e3uity. *his #remium i.e.

the difference between the market $alue and book $alue of e3uity will be accounted in

the asset side of the balance sheet as intangible assets.

7/23/2019 GR-1-TEAM-5-2015


Also #ost the announcement" the debt tax sa$ings will be added to the market $alue of

e3uity and hence will be reflected in the intangible assets in the assets side.

A/b. Swedish Match,s market value balance sheet for the year 2-- #ost the issuance of

debt

7ost the debt issuance of S& billion" the cash and short-term investments would

increase by SEK 4000 million. And the corres#onding entry in the entry would be

increase in the total interest bearing debt by S& --- million.

A/ c. Swedish Match,s market value balance sheet for the year 2-- #ost the re#urchaseof shares

*he cash and shortterm in$estments will decrease by S& --- million and

corres#ondingly the market $alue of e3uity will be reduced by the same amount.

Q. 9an Swedish Match afford to borrow this much money( )hat are the risks( :s it realistic

to ex#ect a +++; rating( Should the com#any go ahead with a le$eraged reca#( :f so" would

you a##ro$e a larger reca#itali'ation(

A.

a <es" the com#any Swedish Match can afford to borrow S& billion.

)orst case scenario

+:*=A 5 S& 1.! billion.

:nterest 5 S& 266 million ; .!% of S& --- million 5 S& 6 million

+:=*A > :nterest 5 S& 1.- billion

So" Swedish match has sufficient cash flow to cater to the current ca#ital ex#enditure and

working ca#ital re3uirements.

b 0isks in$ol$ed

• *he increased debt will lead to large #art of 9ash flows to be used for interest

#ayments will inhibit future ex#ansion and ac3uisitions.

• Swedish Match will be ex#osed to fluctuations of +ond market• +ankru#tcy #ossibility and forced sale of assets" in case of default

7/23/2019 GR-1-TEAM-5-2015


c Swedish Match would be able to maintain +++; rating after reca#itali'ation.

• +:*=A would be around / billion as ex#ected by analysts and the interest on its #re

existing debt in 2--! would be lower than in 2-- #re existing debt is being ra#idly

#aid off

• Swedish Match has a lower interest co$erage ratio and higher *otal =ebt?+:*=A

ratio than the a$erage @S industrial firm ha$ing a +++ ;rating" interest co$erage

ratio will be higher once debt is #aid off

d <es" it should go forward with the reca#itali'ation.

•

Swedish Match will be able to #roduce large and stable cash flows to add $aluethrough tax sa$ing returns ca#ital to shareholders

• :n line with ex#ectations of institutional in$estors

e )e would not recommend larger reca#itali'ation

• :t would lead to lower credit rating as its cash flows are barely able to maintain +++;

rating" a further increase of debt will increase its borrowing cost.

• *he additional debt would also #ose a risk of default

gr-1-team-5-2015

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