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    UST Corporation: investment, risk, and debt

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    "Debt Policy at UST Inc."
    by Mark Mitchell

    1. What are the risks associated with investment in UST shares? What are the risks associated with investment in UST debt? Why would this debt be attractive to an investor?

    2. Why would the company consider a leveraged re-capitalisation after such a long period of conservative lending policies?

    3. Should UST do the recapitalisation? Calculate the incremental value assuming that the debt is immediately taken on (01.01.1999)
    a. Assume a 38% tax rate
    b. Create an income statement to assess whether UST will be able to meet the interest payments and what the
    expected time interest earned would be
    c. Assume that the debt is perpetual and constant. How does your analysis change if you vary the level of debt
    over time

    4. UST has paid uninterrupted regular dividends since 1912. Would this be able to continue?

    5. What do you recommend and why? Would your recommendation change if the case were to be set in 2009?

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    Solution Preview


    1. UST shares are trading at $34.88 and the company P/E ratio indicates that the company shares are overvalued as compared to the industry. Apart from this, at a time when the company faces everyday legal challenges and marketing restrictions, reduction in innovation and tardiness of new product introductions and product line extensions may lead to reduction in sales volume of the company. The company is facing a lowered Wall Street expectation and missed earning because of huge competitions from smaller competitors especially in the value segment (Market share). Along with this, resignation of two executives would reduce investor's expectation towards company shares.

    As far as risk associated with debt is concerned, legal challenges, declining volume, marketing restrictions, taxes, discounting and consolidation may affect the earnings of the company. The tobacco industry faces huge legal challenges because of its health ...

    Solution Summary

    Investment, risks and debt are examined for a UST Corporation.