Torstar Case Report

Group-based cheek report card Torstar bow window BUSN81 Theory of Corporate Finance 2011 Autumn 1. Introduction The case of Torstar Corpo dimensionn suggests the object and burden of repurchasing its Class B sh ars in celestial latitude of 1997. Besides this, the situation of its business structure, neat structure and expenditures, future intention are alike described in the case. Therefore, the purpose of our case arena is to state, analyze and drew to some important conclusions ab protrude Torstar corp, and try to picture its power to compete with a new study paper. . Background Torstar tidy sum was incorporated on February 6, 1958 and published Canadas largest newspaper Toronto Star. It had two of import rivals which are Sun Media Corp. and the Globe and Mail. One launching second national newspaper by Southam Inc. would also be one competitor of The Star. Since 1975, by acquisition of domestic and international book publishing and supplementary educational product s, Torstar found its three major business, newspapers, book publishing and supplementary education. after(prenominal) the acquisition of Troll in fiscal 1997, it also has one 3- yr-time plan to acquire more companies which fit with its core business at the well-founded worth. As of March 31, 1998, Torstar share structure included 5 trillion Class A voting shares and 34 billion Class B non-voting shares. Since they believed prevailing Class B stocks were under time valued, they began to salvation it back from December 17, 1997. In 1997 the debt-to-total-asset ratio was 18%, and precaution believed that 30% was more appropriate.Actually they also suppose that they could carry a 50% debt-to-total-asset ratio if they had a qualified strategic acquisition. Therefore, based on this background, we leave analysis the effects of repurchasing stocks of Torstar, the advantages and disadvantages of its supplement ratio and its ways to investment. Then by adding some assumptions, one vaticination of Torstars power to compete with new launching rival is possible. 3. psychoanalysis 4. 1 Overview of change Flow, debt, Operating Situation and Income The party was doing well so far, until 1997.The gold immix, direct situation and the income were all healthy. We can conclude that from the Balance-Sheet the company had adequate hard currency prevail, exhibit 3 shows that the operate notes die hard kept change magnitude from 1995 to 1997 with the free currency flow, this was enough cash for Torstar face with some possible risky. The only problem is that how to stop the continued increase free cash flow since too much cash fashion increase costs of keeping cash and decreasing marketplace value of cash. The amount about $50,000 would be a good expectation.The three principal(prenominal) business of newspaper, book and supplementary education were operated well, they had sustainable increasing tax and still expenditure, so the profit was increasing positi vely after 1993 acquiring the business of supplementary education, especially in 1997, it got a rapid increasing of net income. See the return of equity below, it shows a well increasing on return of investors. (Base on Net Income over Total Equity) The debt ratio was a little bit low as our analysis, it had space to increase. only when how? Increasing dividend payment or salvation in the open market? We analyzed these two possible ways below. 3. 2 Dividend policy Torstar Corporation has a invariable dividend policy recent years which was to pay out 30 to 35 percent of the previous years operating cash flows. Cash dividend was paid regular quarterly which was keeping $0. 26 per share in 1997. Dividend empirically decreased in the propensity of firms due(p) to its benefits are not attractive than buyback, barely it is still important for management. proceeds of payout dividends * Dividends whitethorn appeal to investors who desire stable cash flow but do not want to incur trans actions cost from sporadically selling share of stocks * On behalf of stockholders, paying dividends can keep cash from investors * Dividends can be used to reduce agency cost of managerial discretion * Managers may increase dividends to foretoken optimism concerning future cash flow * Disadvantage of payout dividends * Dividends are double taxed * Dividends can reduce internal sources of financing.Dividends may force the firm to forgo positive NPV projects or to reply on costly external equity financing * Firms often view dividends as a commitment to their stockholders and quite hesitant to reduce an existing dividends. at one time established, dividend cuts would adversely affect the firms stock price as a negative signal As illustrated by Torstar, a stable cash flow in paying dividends implied a well operating status. The sale of Hebdo provided additional financial flexibility in 1997, free cash flow increased rapidly as can be seen in Appendix.An extra or special cash divide nd and share buy back are two choices to payout adequate cash. Special dividend is expressly not intended to be a recurring event, but as mentioned above, paying dividends with the tax drawback and may produce a negative signal when fluctuating. So keeping the stable payout ratio was a better choice for Torstar. 3. 3 Repurchase Compared with dividend payout, shares repurchase have the listed effects on Torstar Corp, * Send a costly signal to investors that stock of Torstar is a good investment.Recent investments seem to cause side-effect on investors confidence about the company. As mentioned in the article, institutional investors encompass Torstar as a pure play investment into the area of newspaper and book publisher. But from year 1995 to 1997, acquisitions into childrens supplementary education products are viewed as not favorable. They hope Torstar Corporation can continue the diachronic expansion of the newspaper and book division. In order to mitigate the side-effect caus ed by recent investment.Repurchase would result in fewer shares enceinte and so higher equity value per share which leads to a better mathematical motion of the stock. It also sends a signal to the market that the management believes the stock is undervalued. The price of the stock would go up. As a result of the repurchase sends a strong signal to the investors. The signal is costly as a repurchase would use up corporate cash and hard to mimic. * Increase the EPS which shows corking confidence of future achievement Repurchase would decrease the number of shares outstanding which leads to directly change of EPS of the Torstar Corporation.In the interim financial statements, the EPS shows great improvements after the repurchase. (Show in Figure 1) Figure 1 EPS change in 1997 * handiness of unembellished cash from operations By checking the interim financial statements, cash provided by operating activities of Torstar Corporation face an increase in the year 1997, from 25. 6 m illion to 130 million dollars. The well-kept cash from operation activities is too much as the normal on-going capital expenditures was expected to be 25 million to 30 million dollars.Additionally, Capital cycle in the publishing industry is approximately six years and Torstar Corporation has deep modernized its plant. Theres no major capital expenditures were announce for the near future. Thus, excess cash should be paid out. By checking the retained cash in the Quarter 1, 2008, the operating cash is 27. 97 million dollar. It is sufficient for on-going capital expenditure. (shown in figure 2) Reduction in excess cash would reduce the agency cost of managerial discretion as the manager has fewer resources to pursuing consuming perks.Figure 2 Cash provided by operating activities Compared with the dividends payout, repurchase is tax efficient as dividends is taxable. Compared with dividends payout, repurchase avoid price drop results from dividend issuance. Institutional investors are happy when the performance of the stock is good. High price shows the strong performance of the stock. * Optimize capital structure. Torstars long-term debt outstanding was reduced from 321 million in 1996 to 197 million in 1997 result in a debt-to-total assets ratio of percent.While the management believed that a 30 percent tar perish debt-to-assets ratio was more appropriate. similarly less debt may cause the loss of tax shield and work on the value of the firm. While at this level of debt-to-assets ratio, the risk is still acceptable. Torstar Corporation still has excess debt capacity for future capital expansion. Thus repurchase can decrease the shares outstanding, and also decrease the value of assets. It would push up the debt-to-assets ratio to the appropriate level. By using the interim financial statements, we get the trend of debt-to-assets ratio.In December 31 1997, the decrease of debt-to-assets ratio is in the first place a result of the long-term debt decreasing from 510. 007 million to 197. 322 million dollars. And in March 31 1998, the increase in debt-to-assets ratio is a result of repurchasing shares (decreasing in value of total assets). 4. Conclusion After analyzing, we all equate with the activity the Torstar hold, stock repurchasing transfer a strong and credible mark to the market that the company is in a good situation and entrust do better in the future, the debt ratio increases and the market value will also goes up.We estimate that Torstar will keep increasing in the side by side(p) financial year. 5. Appendix Cash Flow Analysis (CDN$000) 1995 1996 1997 operating cash flow 78. 3 102. 9 130. 0 dividends 30. 9 35. 1 40. 3 Capital expenses 20. 3 29. 8 26. 6 free cash flow 27. 2 38. 0 63. 1 Dividends 1st Q 1997 2nd Q 1997 3rd Q 1997 fourth Q 1997 Dividends($000) 10120 9965 10080 10095 Average shares 39151 39107 39060 39044 Dividends per share $0. 26 $0. 26 $0. 26 $0. 26