Trute Case

Trute, Inc. trades on the NYSE. It has a $500 million market value.

Trute processes claim applications for insurance companies, and its service industry is highly fragmented. No one processing company has more than a 5% market share.

The claims processing industry is slow-growth (3% per year). As a result, Trutes s EV/EBITDA multiple is 7x, when the US stock market average is 10x.

Trutes long-serving CEO just retired. In the past, she refused to consider M&A acquisitions, as one way to grow the company.

To boost the growth (and value multiple), the Trutes Board interviewed two new CEO candidates. Both candidates are experienced in the industry.

1. Mr. Smith wants Trute to follow the McKinsey approach. He wants to use Trutes cash flow to expand into business outsourcing for hospital firms, a high growth industry (15%). Public firms involved in that sector trade at 10x EBITDA. M&A targets sell for 10-12x EBITDA.
2. Ms. Jones wants Trute to expand by acquiring small competitors of Trute. She thinks the industrys fragmentation will provide many opportunities.

Use the Stock Price = D/(k-g) equation. Briefly describe the likely effects of hiring A on the variables k and g. What is the future direction or likely change in the Trute stock price? .Then, do the same description for hiring candidate B. Note that both CEO candidates intend to maintain the same debt/equity ratio that Trute has now.