ustcase - UST Corp Basic Facts Firm has very little debt...

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UST Corp
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Basic Facts Firm has very little debt Firm has a dominant market position Firm is extremely profitable, high free cash flows Firm pays out most excess cash flow in form of dividends or repurchases Book debt = 100.0 Book assets = 913.3 Book equity = 468.3 Market equity = 6,470.8 Net income = 467.9 Op. Cash Flow = 429.5 Capital expend. = 35.5 Dividends = 301.1 Repurchases = 151.6
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Proposed Recapitalization Plans Issue $1,000 in debt and repurchase $1,000 additional stock Corporate tax rate is 38% (federal plus state) Each year firm will save (38% x r x 1,000 million) in taxes Assume that they keep this debt level in perpetuity, refinance bonds when they mature Value of perpetual tax savings: (.38 x r x 1,000) / r = $380.00 million
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UST stock price at end of 1998 was $34.88 If they announce the repurchase will be financed by new debt, will UST be able to repurchase at $34.88 per share? Shareholders’ choices
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ustcase - UST Corp Basic Facts Firm has very little debt...

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