UST CASE

Group Presentation
Business analysis.
1) Describe briefly UST’s business, placing
particular emphasis on the potential sources of
risk, and your evaluation thereof. How well is
UST doing?

Financial analysis.
2) Describe briefly the evolution of UST’s current
capital structure, paying attention to the
interaction with business strategy. In your view,
is the current capital structure a good one for
UST?
Share repurchase programme.
Start with the following forecasts for the end of year 1993 (in $ millions
or millions):

1993 Forecast
EBIT 576
Interest expense 0
Taxable income 576
Taxes 219
Net Income 357
Shares outstanding 210
Market value of equity 6300
Share price 30
3) Assume that debt is issued (and shares are repurchased with the
proceeds) at the end of 1993 in the value of either 10%, 20% or
30% of the pre-repurchase market value of UST (i.e., of the market
value based on the table on the previous page).

Assume further that, for 1994: (i) EBIT remains $576 million; (ii)
Shares are repurchased at $30.

Compute the same table as on the previous page for UST for 1994
under the three different repurchase scenarios. En route, you may
need to answer the following question: What do you expect UST’s
bond rating and interest rate to be at each of the debt levels? Be as
precise as possible, but conservative in your estimation and explain
briefly how you came up with these (rough) estimates. The
information on the following page may be helpful.

4) Can UST maintain its current dividend per share under these three
recapitalization schemes?

5) What happens to EPS and why? Which leverage ratio maximizes

EPS?