USG Corporation Harvard Case Solution & Analysis

The USG board is considering a proposed recapitalization plan and for this purpose they are considering four alternatives through which a capitalization process would be completed. The proposed alternative is that the USG should repurchase their ordinary stock, sale of USG equity shares to a friendly third party, sell the entire USG operations to a friendly acquirer and opting for a leveraged recapitalization.

usg corporation case solution

usg corporation case solution

However, opting into the leveraged recapitalization would expose USG operations to financial risk because its debt to equity ratio has already crossed the alarming level and leverage recapitalization would further deteriorate its gearing ratio which will lead the selling of profitable business.

However, since the USG’s gearing ratio is already very much high and its debt to equity ratio is 1.22 that has exposed USG to the risk of not meeting the interest and principle repayments when they fall due, therefore, the leveraged recapitalization does not seem to be a good option hence USG should not opt for a leveraged recapitalization plan.

Further, the valuation of USG operations using its future projected cash flows has also been calculated, but this valuation is subject to some assumption that are inherent in the valuation model used and in order to arrive at the valuation of USG adjusted present value model has been used, this model uses the future projected cash flows over the life of the project and then discounts them using the cost of equity of the company which is USG Corporation. Meanwhile, since the business is a going concern, therefore, the valuation of business should include cash flows till infinity hence a terminal value has been calculated using the assumed growth rate of 3% till infinity. Additionally, the cash flows are discounted using the cost equity assuming that there is no debt and the cost of equity is un-levered and in the next step effects using the debt are incorporated into the present value calculated above in order to arrive at the adjusted present value of USG Corporation. However, based on the calculation performed the adjusted present value of USG equity capital has been arrived at $4,546/- million.

On the other hand USG’s valuation has also been calculated using the multiplier approach and for this purpose price to earnings multiplier has been used, however, the price to earnings multiplier gives the value of $32.68/- per share during the year 1988. Meanwhile the comparison of valuation reached through adjusted present value and multiplier gives different valuation and the reason is that APV uses the future cash flows over the life of the project, whereas the multiplier valuation uses only one year results and the multiplier is also based on the past data.


Based on the analysis of alternates available to USG Corporation, it is clear that both the options are feasible and can be persuaded, but they both need amendments to be made before they can be finally implemented if approved by the shareholders. The first alternate is to accept the offer of $42 per share in the form of cash by Desert Partners but based on the evaluation of USG’s project operations and its projected cash flows it can be analyzed that the real value of USG operations are worth more than the tender offer of $42 offered by Desert Partners. Meanwhile the valuation adjusted present value method used to calculate the market value of USG equity reveals USG’s shares are highly undervalued hence the offer price of Deset Partners should not be accepted at current level, however, as Desert Partners are willing to increase their offer to $50 per share in this case their price should be accepted but subject to that fact that they also submit their solicited tender offer for this price. On the other hand the leveraged recapitalization plan would not be a suitable option because it will lead to high gearing and the USG is already highly geared and raising more finance would mean that organization’s survival is being put at stake, hence USG would be recommended to negotiate with Deser Partners for the submission of soliciting a tender offer for $50 before their offer is accepted.................................

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