Debt Policy at Ust

Debt Policy at UST Case Questions

1- ) Give a brief summary of the company background

2- ) Evaluate UST’s attributes/Risks from view point of bondholder

• Brand Name/Market Position
• Cash Flow Generation
• Cyclicality
• Product Diversification
• Geographical Diversification
• Asset Tangibility
• Litigation

3-According to MM (if no taxes), does debt issuance matter? How about in the presence of taxes what are the pros and cons of debt?

4- ) What is the expected growth rate (g in the formula below) of UST cash flows? Is it lower or higher compared to past?

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Use the 1998 P/E ratio.

Assume CAPM, use 5.45% treasury bond rate for risk free rate, assume market premium is 7%(this value is relative to government bonds), and market beta of 0.65.

5- ) Should UST Inc. undertake the 1$billion recapitalization? Calculate the marginal or incremental effect on UST’s value, assuming the entire recapitalization is implemented immediately (January 1, 1999)

• Assume a 38% tax rate
• Prepare a pro-forma income statement to analyze whether UST will be able to make interest payments
• For the basic analysis assume the 1$ billion in new debt is constant and perpetual. Should UST alter the new debt via a different level or change in the amount of debt through time?

Pro-forma income statement

Fill the gaps for 1999.

Use 20 year Bond yield

What is the present value of tax shield with respect to EACH BOND GRADE?

Use the 5 yr CAGR for sales growth

Use the current EBIT/SALES ratio to calculate the EBIT for 1999