Fin 401

Ryan Pratt
Questions for UST
Instructions: Carefully study the UST case and do the analysis necessary to thoroughly answer the questions
elow! Pre"are and attach e#hiits that e#"lain your decisions! $ood answers will e ac%ed u" with
quantitati&e su""ort whene&er "ossile 'use the financial analysis s%ills that you ha&e studied(! The case will
e graded ased on the quality of your re"ort) including the accuracy of your quantitati&e analysis) the
strength and thoroughness of your argu*ents in su""ort of your decisions) and the quality of the e#"osition
'e!g!) write clearly) a&oid ty"os) for*at e#hiits nicely(! This case is worth +, "oints!
1. UST has a long history of conservative debt policy. Briefly describe why UST is
considering a recapitalization that involves issuing debt and repurchasing equity.
2. escribe the pros and cons of the recapitalization fro! the perspective of the tradeoff
theory of capital structure. "hat are the biggest concerns you have#
$. Should UST underta%e the &1 billion recapitalization# 'alculate the effect on UST(s stoc%
price assu!ing that the entire recapitalization is done i!!ediately )i.e.* +anuary 1* 1,,,-. To
si!plify things* assu!e that the recapitalization will have no significant i!pact on the
probability of financial distress.
.. /s the assu!ption that the recapitalization will not i!pact the probability of financial
distress a good one# "hy or why not#
0. 1valuate the !erits of the recapitalization in the fra!ewor% of the pec%ing order theory of
capital structure. 1valuate its !erits in the fra!ewor% of the agency theory of capital
structure.