# Ust Case Study

2113 WordsMay 29, 20139 Pages
CAPITAL MARKETS AND FINANCING SPR 13 | Group Assignment 1 | UST Case Study | 2/19/2013 | | | | Question 1: 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. WACC Method Using the WACC method, we first derived UST’s return on assets (rA). Since we are given the firm’s market capitalization, debt and cash, we calculated the current Enterprive Value of UST. We were then able to derive the return on asset as a function of UST’s market value. Specifically, we followed the below steps: 1. We estimated \$467.8 million as the free cash flow of UST in 1999 based on the given assumption that its…show more content…
Considering UST only had short-term debt issues prior to the recapitalization, and that credit ratings depend on maturity of debt issued, we cannot simply rely on the commercial paper ratings to extrapolate. We assume that rating will be A based on competitors’ ratings as well as UST’s overall financial standing. We then use this assumption to calculate the value of the company using the two methods above. We assume linear increase in the EBIT and EBITDA at 3% for 1999 from 1998 figures. Considering the debt will be long-term, we test both 10- and 20-year corporate yields as interest rates to see what would be the coverage ratios, using the 1999 projected figures. | Interest Coverage Ratios (Based on 10-year interest rates) | 1999 | AAA | AA | A | BBB | BB+ | BB/BB- | BB | Interest Rate | 5.60 | 5.84 | 6.12 | 6.84 | 7.70 | 8.72 | 11.19 | EBITDA Interest Coverage (x) | 14.44 | 13.85 | 13.21 | 11.82 | 10.50 | 9.27 | 7.23 | EBIT Interest Coverage (x) | 13.86 | 13.29 | 12.68 | 11.34 | 10.08 | 8.90 | 6.93 | | Interest Coverage Ratios (Based on 20-year interest rates) | 1999 | AAA | AA | A | BBB | BB+ | BB/BB- | BB | Interest Rate | 6.47 | 6.76 | 7.05 | 7.82 | -- | -- | -- | EBITDA Interest Coverage (x) | 12.50 | 11.96 | 11.47 | 10.34 | -- | -- | -- | EBIT Interest Coverage (x) | 11.99 | 11.48 | 11.01 | 9.92 | -- | -- | -- | Based on the calculations of the EBIT and EBITDA