Debt Policy at UST Inc Case Solution

Posted by markwahlbarg on May 30th, 2018

Debt Policy at UST Inc Case Solution

UST, Inc. is definitely an very lucrative electric tobacco firm with low debt when compared with other firms inside the tobacco industry. The setting for your case is UST's recent decision to substantially alter its debt policy by borrowing billion to purchase its stock repurchase program.

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.

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