Task:
"Debt Policy at UST Inc."
by Mark Mitchell
https://hbr.org/product/debt-policy-at-ust-inc/an/200069-PDF-ENG
Problem 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?
Problem 2. Why would the company consider a leveraged re-capitalisation after such a long period of conservative lending policies?
Problem 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
Problem 4. UST has paid uninterrupted regular dividends since 1912. Would this be able to continue?
Problem 5. What do you recommend and why? Would your recommendation change if the case were to be set in 2009?