The CEO of UST would really like you to organize a 3 to 4 web page case report discussing UST’s present
monetary scenario and the implications of accelerating leverage in UST’s capital construction. The agency is
contemplating a $1 billion enhance in long-term debt. Assume that the debt could be taken on
instantly and held in perpetuity. The $1 billion could be used instantly to repurchase shares.
Additionally assume that the highest marginal tax fee is 38 p.c. The next questions needs to be addressed
when making ready the report for the CEO:
1) Present an summary of UST’s enterprise operations. In your presentation, be at liberty to supply
visible element of the kind of merchandise UST sells to its prospects.
2) Compile an inventory of things that a credit score analyst or potential bondholder would have in mind
when evaluating UST’s proposed recapitalization. Talk about the necessary elements.
three) Why is UST contemplating a leveraged recapitalization after such a protracted historical past of conservative
debt coverage?
four) Touch upon the previous and future monetary efficiency of UST. What’s the inventory market’s
Assessment of UST’s long-term progress fee?
a. Trace: use the rising perpetuity method, ????zero = ????1⁄(???????????? − ????), and remedy for ???? to deduce
UST’s long-term progress fee. You have to to make use of the CAPM to seek out ????????????. (You might have considered trying
to do some on-line analysis of comparable tobacco corporations to determine the
approximate beta it’s best to use for the CAPM.) Assume that ????1 = ????zero × (1 + ????).
5) Touch upon the monetary efficiency of UST relative to different tobacco corporations.
6) Create three pro-forma earnings statements for fiscal 12 months 1999 underneath every of the next
assumptions: (1) the $1B in debt was not issued; (2) the $1B in debt was issued and is
funding grade; (three) the $1B in debt was issued and is under funding grade. For the latter
two instances, can UST afford to make the curiosity funds primarily based on the respective pro-forma
earnings assertion?
In answering this Question Assignment, the CEO solely needs a simplified pro-forma earnings assertion that
takes the next type:
SALES
EBIT
INTEREST EXPENSE
PRE-TAX NET INCOME
TAX
NET INCOME
7) Calculate the change in UST’s worth because of the tax defend advantages of the extra debt. For this
Question Assignment, it could be helpful to create a desk containing the next data: worth of the
tax defend, worth of the agency, worth of the debt, worth of the fairness, variety of shares
repurchased, variety of shares excellent, and inventory value. The desk ought to cowl the identical
three instances as Question Assignment 6. Assume that the $1B in debt is used to repurchase $1B in shares.
eight) Touch upon potential modifications in worth from the recapitalization resulting from different market frictions
equivalent to chapter prices, data signaling, or different market frictions that you just really feel are
relevant.
9) UST has paid uninterrupted dividends since 1912. Will the recapitalization hamper future
dividend funds? Take into account, specifically, the dividend paid per share in 1999, with the
assumption that UST will attempt to keep a relentless dividend payout ratio.
The case report needs to be three to 4 pages in size (use the default spacing in Microsoft Phrase) with
any helpful tables or graphs hooked up. A one-paragraph government abstract needs to be included on the
starting of the report. The report needs to be introduced in knowledgeable method and skim as a cohesive
doc in order that the CEO can simply perceive your details. If you might want to make any
assumptions, make them clear. Calculations needs to be relegated to an appendix. A report that consists
of a multitude of calculations and numbers or a collection of random paragraphs pasted collectively wouldn’t be
acceptable.
The case presentation needs to be about 20-30 minutes in size. Much like the report, it must also be
introduced cohesively and in knowledgeable method in order that the CEO can simply perceive your major
factors. The presentation needs to be informative, concise, and will maintain the listener engaged. The
presenter must also be ready to reply questions from the viewers. A most of two folks
The CEO of UST has requested you to jot down a three- to four-page case report on UST’s present scenario.
monetary state, in addition to the ramifications of UST’s capital construction changing into extra leveraged. The corporate is
A $1 billion enhance in long-term debt is being thought of. Assume the debt will likely be paid off.
instantaneously and indefinitely. The $1 billion could be used to purchase again shares instantly.
Additionally assume that the highest marginal tax fee is 38 p.c. The next questions needs to be addressed
when making ready the report for the CEO:
1) Present an summary of UST’s enterprise operations. In your presentation, be at liberty to supply
visible element of the kind of merchandise UST sells to its prospects.
2) Compile an inventory of things that a credit score
