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UST Case Solution Essay

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Key Issue: 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 bond …show more content…

Pro-forma income statement and interest payment ability

Pro-forma income statement to illustrate interest and dividend payment ability is based on various assumptions as shown in Exhibit 1. Expected cases are the measures used in the following discussion. Conservatism is adopted throughout the assumptions especially sales growth rate, credit rating and Medicaid penalty assumptions.

Pro-forma income statement and key credit rating determinants are shown in Exhibit 2 and 3 respectively. Remaining share no. of 158.3m after repurchase is based on proportional value addition distribution between cash-out and remaining shareholders and this number is inserted to calculate earning per share and corresponding immediate share price change after announcement of repurchase program. According to Exhibit 3 and industrial average of relevant grades, only fund flow/ total debt and total debt/ capital measures are not comparable with A credit rating. Considering EBIT and EBITDA interest coverage are two most important criteria and equity market value is so substantially different from book value which leads to a healthy

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