Essay on Ust Case Solution

1384 Words Nov 8th, 2008 6 Pages
Key Issue 2: Is $1b appropriate to enhance UST’s firm value and ultimately shareholder value?

Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
Before evaluating whether $1b is value enhancing in quantitative measure, ability to cope with pre-requisite interest payment and potentially dividend payment (possibly dividend growth maintenance) should be considered.

Required debt rate and pro forma income statement

Risk determinants

Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate
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Three scenarios in value distribution is shown in Exhibit 5, with market scenario meaning shares can be directly purchased from the market at 1998 year-end price, equality scenario meaning value distributes evenly for groups of cash-out and remaining equity holders and proportion scenario (base case) meaning market is rational by elevating share price to the level that both groups of investors enjoy same price percentage growth eventually. In base case, share price remains $36.6 upon announcement and after program completion, while, in market scenario and equality scenario, the number is $37 and $35.9 respectively. Implication of this analysis is that management in charge of this program should keep communication open to public investors regarding value enhancement expectations so as to monitor more proportional value distribution among two investor groups.

Alternative repurchase arrangements and evaluation

Alternative courses of action are proposed and benefits are weighed against their drawbacks or insufficiencies.

Firstly, different extents of repurchase - $500m and $1,500m, are considered. In the $500m case, UST is likely to obtain a credit rating of triple A due to EBIT and EBITDA interest coverage ratios, free operating cash flow debt coverage ratio, return on

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