The CEO of UST would like you to prepare a three to four page case report discussing UST\u2019s current<\/p>\n
financial situation and the implications of increasing leverage in UST\u2019s capital structure. The firm is<\/p>\n
considering a $1 billion increase in long-term debt. Assume that the debt would be taken on<\/p>\n
immediately and held in perpetuity. The $1 billion would be used immediately to repurchase shares.<\/p>\n
Also assume that the top marginal tax rate is 38 percent. The following questions should be addressed<\/p>\n
when preparing the report for the CEO:<\/p>\n
1) Provide an overview of UST\u2019s business operations. In your presentation, feel free to provide<\/p>\n
visual detail of the type of products UST sells to its customers.<\/p>\n
2) Compile a list of factors that a credit analyst or potential bondholder would take into account<\/p>\n
when evaluating UST\u2019s proposed recapitalization. Discuss the important factors.<\/p>\n
3) Why is UST considering a leveraged recapitalization after such a long history of conservative<\/p>\n
debt policy?<\/p>\n
4) Comment on the past and future financial performance of UST. What is the stock market\u2019s<\/p>\n
assessment of UST\u2019s long-term growth rate?<\/p>\n
a. Hint: use the growing perpetuity formula, ????0 = ????1\u2044(???????????? \u2212 ????), and solve for ???? to infer<\/p>\n
UST\u2019s long-term growth rate. You will need to use the CAPM to find ????????????. (You may want<\/p>\n
to do some online research of comparable tobacco companies to figure out the<\/p>\n
approximate beta you should use for the CAPM.) Assume that ????1 = ????0 \u00d7 (1 + ????).<\/p>\n
5) Comment on the financial performance of UST relative to other tobacco companies.<\/p>\n
6) Create three pro-forma income statements for fiscal year 1999 under each of the following<\/p>\n
assumptions: (1) the $1B in debt was not issued; (2) the $1B in debt was issued and is<\/p>\n
investment grade; (3) the $1B in debt was issued and is below investment grade. For the latter<\/p>\n
two cases, can UST afford to make the interest payments based on the respective pro-forma<\/p>\n
income statement?<\/p>\n
In answering this question, the CEO only wants a simplified pro-forma income statement that<\/p>\n
takes the following form:<\/p>\n
SALES<\/p>\n
EBIT<\/p>\n
INTEREST EXPENSE<\/p>\n
PRE-TAX NET INCOME<\/p>\n
TAX<\/p>\n
NET INCOME<\/p>\n
7) Calculate the change in UST\u2019s value due to the tax shield benefits of the additional debt. For this<\/p>\n
question, it would be useful to create a table containing the following information: value of the<\/p>\n
tax shield, value of the firm, value of the debt, value of the equity, number of shares<\/p>\n
repurchased, number of shares outstanding, and stock price. The table should cover the same<\/p>\n
three cases as Question 6. Assume that the $1B in debt is used to repurchase $1B in shares.<\/p>\n
8) Comment on possible changes in value from the recapitalization due to other market frictions<\/p>\n
such as bankruptcy costs, information signaling, or other market frictions that you feel are<\/p>\n
applicable.<\/p>\n
9) UST has paid uninterrupted dividends since 1912. Will the recapitalization hamper future<\/p>\n
dividend payments? Consider, in particular, the dividend paid per share in 1999, with the<\/p>\n
assumption that UST will try to maintain a constant dividend payout ratio.<\/p>\n
The case report should be three to four pages in length (use the default spacing in Microsoft Word) with<\/p>\n
any useful tables or graphs attached. A one-paragraph executive summary should be included at the<\/p>\n
beginning of the report. The report should be presented in a professional manner and read as a cohesive<\/p>\n
document so that the CEO can easily understand your main points. If you need to make any<\/p>\n
assumptions, make them clear. Calculations should be relegated to an appendix. A report that consists<\/p>\n
of a mess of calculations and numbers or a series of random paragraphs pasted together would not be<\/p>\n
acceptable.<\/p>\n
The case presentation should be about 20-30 minutes in length. Similar to the report, it should also be<\/p>\n
presented cohesively and in a professional manner so that the CEO can easily understand your main<\/p>\n
points. The presentation should be informative, concise, and should keep the listener engaged. The<\/p>\n
presenter should also be prepared to answer questions from the audience. A maximum of two people<\/p>\n
from your group should present your findings.<\/p>\n","protected":false},"excerpt":{"rendered":"
The CEO of UST would like you to prepare a three to four page case report discussing UST\u2019s current financial situation and the implications of\u2026<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[479,537,172,478],"tags":[543,539,541,549,545,542,548,550,558,551,538,555,540,560,552,557,559,554,561,556,553,546,547,544],"class_list":["post-13013","post","type-post","status-publish","format-standard","hentry","category-nursing-course-hero","category-nursing-essay-pro","category-nursing-study-bay","category-nursing-study-pool","tag-ama","tag-apa-citation-generator","tag-apa-essay-writer-free","tag-apa-format-7th-edition","tag-apa-format-example","tag-apa-in-text-citation","tag-buy-custom-college-essays-online","tag-buy-mla-paper-online","tag-chicago","tag-custom-academic-writing-services","tag-custom-mla-style-papers","tag-harvard","tag-ieee","tag-is-mla-format-double-spaced","tag-mla-citation-generator","tag-mla-format-font","tag-mla-format-font-size","tag-mla-format-purdue-owl","tag-mla-format-spacing","tag-mla-header-format","tag-mla-in-text-citation","tag-purdue-owl-apa","tag-purdue-owl-apa-citation","tag-write-my-paper-in-apa-format"],"_links":{"self":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/13013","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/comments?post=13013"}],"version-history":[{"count":0,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/13013\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/media?parent=13013"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/categories?post=13013"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/tags?post=13013"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}