Debt Policy at Ust Inc.

What is your estimate of Ace’s cost of new common stock, ke? What are some potential weaknesses in the procedures used to obtain this estimate?

* All assumptions are identical as base case except for changes to equity and debt.

Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity.

- A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $10,800. Equity is worth $12,000. The firm has 750 shares of stock outstanding and net income of $775. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

The 50% premium can be explained by the valuation of the firm based purely on its projected future cash flows and assumed growth rate (value = $391.58 million) plus the added value that the ITS can provide (value = $114.2 million) when the leveraged buyout is completed. There are two components to the ITS or income tax shield –

Warner-Lambert, an international pharmaceutical and consumer products company in Ireland, planned to launch a new product in 1990 called Niconil which was made for those people who would like to quit smoking. Niconil were different than the existing smoking cessation products in the market. Managers of the company believed that Niconil had many competitive advantages over its competitors and were very confident of the product. But there were some arguments about pricing strategy and marketing communication: Should Niconil be priced at a premium over cigarettes or on a par with cigarettes?What kind of advertising and promotion method they should use? Before launch the product

3. Compute the unlevered free cash flow and the interest tax shields from 2008 to 2012 based on estimates provided in Exhibit 1 and Exhibit 6. (3 points)

Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

In order to calculate the impact of the leverage recapitalization on UST’s value, we used the WACC and APV methods to calculate its value before and after the recapitalization.

These amounts of tax savings should be added to the incremental cost savings for each year to come up with the total cash inflows. The present value of all these cash inflows and outflows can be calculated by discounting them at 12.19%. This rate is calculated by assuming that the purchasing power parity holds in this scenario. The company can do the feasibility analysis by looking at both from the subsidiary’s and parent’s perspective by assuming that the purchasing power parity holds. Hence, this rate can be regarded as opportunity cost of investment because it is the second best alternative for the company for investment purposes.

Present value of debt tax shield at a corporate tax rate of 35% ($ m)

was 35.1 billion dollars. With a product that kills so many of its customers, your only concern in this industry is to increase sales and make a profit. Definitely in the tobacco industry and most others, it is my opinion that you cannot cater to the best interest of both the company and the consumer. Even a good company with the best intentions will eventually come to a crossroad where choosing what is best for one will not have such a great outcome for the other. Their best interests will ultimately conflict, and you will be forced make a choice between the two.

The use of tobacco is a very controversial topic here in the United States. The harmful side effects of tobacco are well known and consequently, many believe that it should be outlawed. Though this has not yet occurred, constant regulations on the industry and

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.

I have chosen cigarettes to be my market transaction as it is has a very large and wide market. A cigarette is a product consumed through smoking and manufactured out of cured and finely cut tobacco leaves and reconstituted tobacco, often combined with other additives1,