Hi,

Im wondering if i*ve got this one right.

Case: Assignment 3: Debt Policy at UST Inc

Question: Calculate the effect on USTs stock price assuming that the entire recapitalization is done immediately (January 1, 1999). In this calculation, assume the following:

i. The corporate tax rate is 38%.

ii. All equity is bought back (repurchased) at a price that reflects the added value of the tax shield.

iii. The recapitalization will have no significant impact on the probability of bankruptcy. Therefore, you can ignore bankruptcy costs in your calculations.

Answer:

Status Quo $1 Billion Recap Plan

PV Tax Shields (tD)

0.00 380.00

Market Value of UST

6,469.00 6,849.00

Net Debt

0.00 1,000.00

Stock Price

34.88 36.92

Shares Repurchased

- 27.08

Shares outstanding

185.50 158.42

Market value of Equity

6,469.00 6,849.00

Debt/ Equity

0.00 0.15