Debt Policy at UST Inc Case Solution

Case ID: 200069
Solution ID: 22293

Words: 1500

Price: $75

Case Solution

UST INC. is a very lucrative smokeless tobacco company which has a low debt ratio compared to other companies in the tobacco industry. The case background includes UST’s current resolution to considerably change its debt strategy by taking a loan of $1 billion to fund its equity repurchase plan.

Excel Calculations

Income Statement Projections- Actual 1998 and Projected 1999

Without Debt   AAA Debt   AA Debt   BBB Debt

 Value of UST Under Varying Leverage

Equity Finance, Leveraged Company

Dividend Payment Under Varying Debt- 1998 and 1999

No Debt        AAA Debt    BBB Debt

Questions Covered

What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of a bondholder.

Why is UST Inc. considering a leveraged recapitalization after such a long history of conservative debt policy?

Should UST Inc. undertake the 1$ billion recapitalization? Calculate the marginal(or incremental) effect on UST’s value, assuming that the entire recapitalization is implemented immediately (January 1st , 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 a change in the amount of debt through time?

Use Exhibit 8 to determine UST’s credit rating and interest rate. State your assumptions clearly

     4.  UST Inc. has paid uninterrupted dividends since 1912. Will the recapitalization hamper   future dividend payments?

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