CORPORATE FINANCE

Information about the Case Report

1. Case: Debt policy at UST Inc.

2. Your case report MUST be typed, and must be handed in as a paper copy in class. Hand-written reports are not accepted.

3. Feel free to make assumptions; justify your assumptions.

4. You report will be evaluated based on the following criteria:

· Frame the issue. Briefly describe that UST is planning to reverse a long-standing conservative financial policy.

· Evaluate the business risks of UST from the viewpoint of a credit analyst or potential bondholder.

· Discuss UST’s very profitable past financial performance. Is the past performance expected to continue in the future?

· 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 1, 1999).

a. Assume a 38% tax rate.

b. Prepare a pro-forma income statement to analyze whether UST will be able to make interest payments.

· Assess the impact of the recapitalization plan on dividend payout.

· Summarize your conclusions.