UST Case Report:
Write a case report: Summary the case, Analyze below questions, and give a recommendation for the optimal capital structure.
1. Assess the business and financial risk of UST Inc.
2. What are the benefits of debt in the case of UST Inc.?
3. Exhibit 4 provides pro forma debt/total capital ratios. What interest rate do you expect UST Inc. to pay for these various debt levels?
4. What are the costs of debt? For example, should management worry about the possibility of bankruptcy?
5. What is the optimal capital structure for UST Inc.? Do you expect the new management team to implement a recapitalization plan similar to what you have proposed?
A GUIDE TO CASE ANALYSIS
The purpose of the UST case is to come up with a recommendation for the optimal capital structure (i.e., the optimal degree of leverage) for the firm, taking into account the firm's business risk and its financial risk (for different levels of debt). The case is a practical application of the static tradeoff theory.
Start your case analysis by assessing UST's business risk and financial risk. That is, evaluate the firm's operating strategy, and past operating and financial performance (both over time and relative to competitors). This is important to develop a good understanding of the firm and the market that it operates in. You can take the perspective of a potential bondholder (or a credit rating agency) in the firm when making this assessment. Try to include all factors that you consider relevant.
Once you have done this, try to assess the firm's future performance.
Next, analyze the relevant interest payments and the expected benefits and costs associated with a recapitalization for the different levels of debt given in case Exhibit 4 (see spreadsheet). What types of leverage related benefits and costs can be identified, and what is your estimate of their magnitude? Support your analysis with numbers (estimates), where possible, but in any case make sure that you include a good qualitative discussion and motivation.
You can assume that if UST decides to increase its leverage, it will do so through a leveraged recapitalization. That is, the firm would issue a fixed (permanent) amount of debt and use the proceeds of the debt issue to repurchase shares in the open market.
Finally, state your recommendation for the optimal capital structure policy for UST, and briefly discuss how the firm could most feasibly move towards this target.
Attachment:- Assignment Files.rar