Corporate Finance_swedish Match Case Solution Report

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Executive Summary:

After the thorough analysis of the Swedish Match Company’s financial data, our group would suggest the firm to issue SEK 4 Billion debt in European Market to repurchase its current shares. A currency swap is advised to hedge the exchange rate risks.

After the issuance, Swedish Match would benefit from a tax shield of SEK 1,12 Billion and an increase of SEK 3,48 per share. However, we believe that the credit rating of the firm’s debt would be downgraded from A- to BBB-. Taking consideration that Swedish Match would like to increase its leverage and it has the flexibility of the credit rating, we suggest the firm should go ahead with this leveraged recapitalization, however, we believe it would be too risky to approve a larger recapitalization,

Question 1:

The tax saving effect comes from the reduction of Swedish Match’s pre-tax income due to increase in interest payment related to the new debt.

Since the total debt amount is 4 billion SEK and the annual interest rate is 4,5%, the annual interest payment is equal to 4 x 4,5% = 0,18 billion SEK.

An increase of 0,18 billion SEK in interest payment decreases pre-tax income by the same amount, and thus decrease income tax by 0,18 x 28% = 0,0504 billion SEK or 50,4 million SEK.

So is Swedish Match will save 50,4 million SEK in taxes each year (annual debt tax shield).

Now we will calculate the present to debt tax shield:

We take the interest rate as the discount rate, we assume the debt being permanent,

PVDTS = annual tax shield/discount rate = 50,4/4,5% = 1120 million SEK or 1,12 billion SEK

So the value of the interest tax shield is 1,12 billion SEK.

Question 2:

Swedish Match’s book value balance sheet evolution:

1. Initial Book Value Balance Sheet:

Based on data given in the case, Swedish Match’s initial book value balance sheet is as following: