Evaluating UST Recapitalization Decision
When discounting future dividends, use a 10% discount rate and a 38% tax rate. Assume that stock market participants are unaware of the repurchase operation and that the additional debt is continuous and unchanging.,
1) Which are UST’s main business risks? Consider them from a bondholder’s perspective.,
2) After so many years of careful debt management, why is UST contemplating a leveraged recapitalization?,
3) Should the $1 billion recapitalization be carried out by UST? To determine if UST will be able to pay interest rates, create a pro forma income statement for 1999. To what extent does your judgement depend on the rating given to UST bonds?
From a bondholder’s perspective, UST (a hypothetical company in this case) faces several risks that could affect its ability to repay its debts. These risks can impact both its cash flows and its ability to service debt:
- Revenue Volatility: If UST operates in a cyclical or highly competitive market, its revenue may fluctuate significantly, affecting its ability to generate the cash flow needed to meet debt obligations. Bondholders would be concerned if UST’s revenue streams were not stable or predictable.
- Interest Rate Risk: As interest rates rise, UST’s borrowing costs could increase if its existing debt is variable-rate. This would lead to higher interest payments, potentially putting a strain on cash flow. Bondholders would be concerned about the company’s ability to generate sufficient returns to cover these increased costs…
From a bondholder’s perspective, UST (a hypothetical company in this case) faces several risks that could affect its ability to repay its debts. These risks can impact both its cash flows and its ability to service debt:
- Revenue Volatility: If UST operates in a cyclical or highly competitive market, its revenue may fluctuate significantly, affecting its ability to generate the cash flow needed to meet debt obligations. Bondholders would be concerned if UST’s revenue streams were not stable or predictable.
- Interest Rate Risk: As interest rates rise, UST’s borrowing costs could increase if its existing debt is variable-rate. This would lead to higher interest payments, potentially putting a strain on cash flow. Bondholders would be concerned about the company’s ability to generate sufficient returns to cover these increased costs…
