The Addition of Debt Increases the Value of UST

Operating Income
Interest Expense
Pretax Earnings
Taxes
Net Earnings
Total Dividends
Shares Outstanding

Debt as Percent of Pre-Restructuring

Firm Value
0%
10%
20%
30%
$
570 $
570 $
570 $
570
$
- $
46 $
98 $
161
$
570 $
524 $
472 $
409
$
217 $
199 $
179 $
156
$
353 $
325 $
292 $
254
$

202 $
185 $
167 $
145
210
189
168
147

Earnings / share
$ 1.68 $
Dividends as % of EPS $ 0.57 $
Dividends / share
0.96
$

1.72 $
0.57 $
0.98 $

1.74 $
0.57 $
0.99 $

1.73
0.57
0.98

Market Equity

$ 6,300 $ 5,909 $ 5,519 $ 5,128

Stock Price

$ 30.00 $ 31.27 $ 32.85 $ 34.89

Debt
Bond Rating
Interest Rate
Interest Coverage

0
NA

630 $ 1,260 $ 1,890

AA
A
BBB
7.30%
7.80%
8.50%
12.39
5.80
3.55

Value of Firm Unlevered $ 6,300 $ 6,300 $ 6,300 $ 6,300

PV(Tax Shield)
$
- $
239 $
479 $
718
Value of Levered Firm $ 6,300 $ 6,539 $ 6,779 $ 7,018

Tax rate is 38%

Debt is used to buy
shares back at $30 each

Dividends remain a fixed

percentage of EPS

Market Equity =
Total Value - Debt
Stock Price =
Market Equity /
# Shares Outstanding
Debt is assumed to be
kept for perpetuity, so:
PV(Tax Shield) =
(Tax Rate * Debt * Rd) /
Rd
Value Levered =
Value Unlevered +
PV(Tax Shield)

The Addition of Debt Increases the Value of UST

Value Levered =
Value Unlevered +
PV(Tax Shield)

UST Optimal Capital Structure

Costs of
Financial Distress
( bankruptcy cost,
monitoring benefits
of debt, issuance
cost)

$8,500
$8,000
$7,500

Value of Firm

$7,000
Row 34
Value Levered
Row 36
Value Unlevered

$6,500
$6,000
$5,500
Optimal Capital Structure
(This optimal point is for
illustrative purposes only. The
actual optimal point for UST
may be different.)

$5,000
$4,500
$4,000
0%

10%

20%

30%

40%

Debt / Value

50%

60%

70%

80%

The Addition of Debt Increases the Value of UST

Debt as Percent of Pre-Restructuring

Firm Value
0%
10%
20%
30%
$
570 $
570 $
570 $
570
$
- $
46 $
98 $
161
$
570 $
524 $
472 $
409
$
217 $
199 $
179 $
156
$
353 $
325 $
292 $
254

40%
$ 570
$ 214
$ 356
$ 135
$ 221

50%
$ 570
$ 287
$ 283
$ 108
$ 176

60%
$ 570
$ 344
$ 226
$ 86
$ 140

70%
$ 570
$ 467
$ 103
$ 39
$ 64

$ 126
126

$ 100
105

1.73
0.57
0.98

$ 1.75
$ 0.57
$ 1.00

$ 1.67
$ 0.57
$ 0.95

$ 1.67
$ 0.57
$ 0.95

$ 1.01
$ 0.57
$ 0.58

Market Equity

$ 6,300 $ 5,909 $ 5,519 $ 5,128

$4,738

$4,347

$3,956

$3,566

Stock Price

$ 30.00 $ 31.27 $ 32.85 $ 34.89

$37.60

$41.40

$47.10

$56.60

Debt
Bond Rating
Interest Rate
Interest Coverage
Bond Rating

$2,520
BBB
8.50%

$3,150
BBB
9.10%

$3,780 $4,410
BBB
BBB
9.10% 10.60%

Operating Income
Interest Expense
Pretax Earnings
Taxes
Net Earnings
Total Dividends
Shares Outstanding

202 $
185 $
167 $
145
210
189
168
147

Earnings / share
$ 1.68 $
Dividends as % of EPS $ 0.57 $
Dividends / share
0.96
$

0
NA
NA

1.72 $
0.57 $
0.98 $

1.74 $
0.57 $
0.99 $

630 $ 1,260 $ 1,890

AA
A
BBB
7.30%
7.80%
8.50%

Value of Firm Unlevered $ 6,300 $ 6,300 $ 6,300 $ 6,300

PV(Tax Shield)
$
- $
239 $
479 $
718
Value of Levered Firm $ 6,300 $ 6,539 $ 6,779 $ 7,018

### $6,300
$ 958 $1,197
$7,258 $7,497

80
84

$6,300
$1,436
$7,736

36
63

$6,300
$1,676
$7,976

The Addition of Debt Increases the Value of UST

6,300

6,300

6,539

6,300

0%

6,779

6,300

10%

7,018

30%

40%

50%

60%

70%

6,300

$ 6,300

$ 6,300

$ 6,300

$ 6,300

20%

$ 7,258

$ 7,497

$ 7,736

$ 7,976