BUSN81 Theory of Corporate Finance
The case of Torstar Corporation suggests the plan and result of repurchasing its Class B shares in December of 1997. Besides this, the situation of its business structure, capital structure and expenditures, future plan are also described in the case. Therefore, the purpose of our case study is to state, analyze and drew to some important conclusions about Torstar Corporation, and try to estimate its power to compete with a new national newspaper. 2. Background
Torstar Corporation was incorporated on February 6, 1958 and published Canada’s largest newspaper Toronto Star. It had two main 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 products, Torstar found its three major business, newspapers, book publishing and supplementary education. After the acquisition of Troll in fiscal 1997, it also has one 3-year-time plan to acquire more companies which fit with its core business at the reasonable price. As of March 31, 1998, Torstar share structure included 5 million Class A voting shares and 34 million Class B non-voting shares. Since they believed prevailing Class B stocks were undervalued, they began to repurchase it back from December 17, 1997. In 1997 the debt-to-total-asset ratio was 18%, and management 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 suitable strategic acquisition. Therefore, based on this background, we will analysis the effects of repurchasing stocks of Torstar, the advantages and disadvantages of its leverage ratio and its ways to investment. Then by adding some assumptions, one prediction of Torstar’s power to compete with new launching rival is possible. 3. Analysis
4.1 Overview of Cash Flow, debt, Operating Situation and Income The company was doing well so far, until 1997. The cash flow, operating situation and the income were all healthy. We can conclude that from the Balance-Sheet the company had adequate cash flow, exhibit 3 shows that the operating cash flow kept increasing from 1995 to 1997 with the free cash flow, this was enough cash for Torstar facing with some possible risky. The only problem is that how to stop the continued increasing free cash flow since too much cash means increasing costs of keeping cash and decreasing market value of cash. The amount about $50,000 would be a good expectation. The three main business of newspaper, book and supplementary education were operated well, they had sustainable increasing revenue and stable expenditure, so the profit was increasing positively 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. But how? Increasing dividend payment or repurchase in the open market? We analyzed these two possible ways below. 3.2 Dividend policy
Torstar Corporation has a stable dividend policy recent years which was to pay out 30 to 35 percent of the previous year’s 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 to its benefits are not attractive than repurchase, but it is still important for management. * Advantage of payout dividends
* Dividends may appeal to investors who desire stable cash flow but do not want to incur transactions cost from periodically selling share of stocks * On behalf of stockholders, paying dividends can keep...