1. Using below the information, 1. What would be the credit rating for UST bonds? (hint, calculate EBITA/Interest and EBIT/Interest, and Debt/EBITDA for UST, AAA, AA, A, BBB, BB, B)
   

Exhibit 6 Key Financial Ratios for Tobacco Companies Tobacco Product Manufacturers Tobacco Leaf Merchants North Tobacco Atlantic ALIJA Nabisco Standard Companies Three - years ( 1995 - 1998 ) Philip Morris Trading Co . @ Holdings DiMon Inc . Commercial Universal Corp Median UST Inc . Corporate Credit Plating A Bit BBB - BB + A - Outlook Stable Stable Stable Negative Positive* Stable EBIT interest coverage ( x) 1 1 . 2 1. 3 2.5 2.6 3.3 3.5 3.0 101. 5 EBITDA interest coverage ( x) 12.7 1. 6 3. 7 3.3 5. 4 4 . 4 4. 1 105. 6 Fund flow / total debt ( 9/6) 56.3 14.5 12.3 6.7 18.5 13. 4 364.0 Free operating cash flow "total debt ( %) $ 1. 8 5. 6 6. 8 10 . 1 ( 2.6 ) 2. 9 6. 2 296.5 Return on capital ( %/6) 38. 4 1 1. 8 10.3 13.4 6.6 16.9 12.6 140.6 Operating income / sales ( %) 26. 0 38 . 1 15.5 16. 4 3.6 7.6 16.0 55.7 Total debt capital ( including ST debt ; ( %) 49. 3 90. 6 55 . 1 67. 8 77.5 65. 8 65. 8 28. 2 Source : Data provided by Standard & Poor's to the casewriter . `Data for 1987 -1998. ` Excludes UST IncExhibit & Key Financial Ratiosa Adjusted Key Industrial Financial Ratios - Senior Debt Ratings Industrial Long - Term Debt Investment Grade Noninvestment Grade / Speculative* Three - Years ( 1996 - 1998 ) Medians AAA AA BBB BB B CCC EBIT interest coverage ( x ) 9 . 2 7 . 2 4. 1 2.5 EBITDA interest coverage ( x ) 12.9 18. 7 14.0 10.0 6 . 3 3.9 1 . 2 (0. 9) 2. 3 0 . 2 Fund flow/total debt ( 9/6) 89.7 67. 0 49.5 32. 2 20. 1 10.5 7. 4 Free operating cash flow, total debt ( 9/6) 40.5 21. 6 17. 4 6. 3 1. 0 | 4.0 ) (25. 4 ) Return on capital ( % ) 30. 6 25.1 19.6 15. 4 12.6 9. 2 ( 8 . 8) Operating income / sales ( 9/6) 30.9 25. 2 17.9 15 . 8 14. 4 1 1 . 2 5.0 Long - term debt /capital ( 9/6) 21 . 4 29.3 23.3 40. 8 55. 3 68 . 8 71. 5 Total debt /capital ( including ST debt ; (%) 31. 8 37. 0 39. 2 46. 4 58.5 71 . 4 79. 4 Corporate Bond Yields Debt Yields - December 22, 1998 U. S . Treasury AAA AA BBB BB + BB/BB - BB 10 - Year 1 9/0) 4.70 5. 50 5. 84 6. 12 6. 84 7.70 8.72 20 - Year (9/6) 5. 45 5. 47 6.76 1 1. 19 7. 05 7. 82 Formulas for Adjusted Key Industrial Financial Ratios* EBIT Interest coverage = Earnings from continuing operations before interest and taxes!" Gross interest incurred before subtracting capitalized interest and interest income* EBITDA interest coverage = Earnings from continuing operations before interest , taxes , depreciation and amortization " Gross interest incurred before subtracting capitalized interest and interest income Funds from operations ,'Total debt = Net income from continuing operations + depreciation , amortization , deferred income taxes , and other noncash!" Long-term debt + current maturities , commercial paper , and other short- term borrowings Free operating cash flow ' Total debt = Funds from operations - capital expenditures - I + ) the increase / decrease ) in working capital ( excluding changes in cash , marketable securities and ST debt" Long - term debt + current maturities , commercial paper , and other short- term borrowings Pretax return on capital - EBIT + interest expense" Average of beginning and ending year capital , including short - term debt, current maturities , long-term debt , noncurrent deferred taxes and equity Operating income / Sales =\ Sales minus cost of goods manufactured before depreciation and amortization ) , SGBA and ALRD costs" Sales Long-term debt " Capitalization = Long-term debti Long-term debt + shareholders' equity' (including preferred stock; + minority interest Total debt " Capitalization =\ Long-term debt + current maturities , commercial paper , and other short- term borrowings!" Long-term debt + current maturities , commercial paper and other short- term borrowings + shareholders' equity lincluding preferred stock'; + minority interest