Ust Case Study
CAPITAL MARKETS AND FINANCING SPR 13 | Group Assignment 1 | UST Case Study | 2/19/2013 | | |
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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 operating cash flows will grow at a rate of 3% in perpetuity. Free Cash Flow | | | | Sales | 1423.2 | | 1465.9 | EBITDA | 785.0 | | 808.6 | EBIT | 753.3 | | 775.9 | Tax | 287.6 | | 294.8 | Dep & Amort. | 31.7 | | 32.7 | CAPEX | 35.5 | | 36.6 | Working Capital | 309.9 | | 319.2 | Change in WC | | | 9.3 | | | | | Free Operating Cash Flow | 429.5 | | 467.8 |
2. We calculated $6,537.6 million as UST’s enterprise value as of the end of 1998 by adding together UST’s market equity of $6,470.8 million and total debt of $100 million and subtracting cash of $33.2 million from this value. 3. Given the assumed growth rate of 3% and UST’s free cash flow in 1999 and enterprise value, we derived 10.16% as the WACC from the growing perpetuity formula: EV=FCFWACC-g → WACC= FCFEV +g 4. We derived 10.22% as the rA from the WACC formula: WACC=Ra 1-tD V.
In the presence of taxes, the WACC equals rA if the company is 100% equity-financed. Hence, instinctively, we can expect the WACC and rA to be closely equivalent in the case of UST due to its low leverage ratio of 1.52% prior to the recapitalization.
Once we have derived the rA, we re-calculated the WACC before and
|
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 operating cash flows will grow at a rate of 3% in perpetuity. Free Cash Flow | | | | Sales | 1423.2 | | 1465.9 | EBITDA | 785.0 | | 808.6 | EBIT | 753.3 | | 775.9 | Tax | 287.6 | | 294.8 | Dep & Amort. | 31.7 | | 32.7 | CAPEX | 35.5 | | 36.6 | Working Capital | 309.9 | | 319.2 | Change in WC | | | 9.3 | | | | | Free Operating Cash Flow | 429.5 | | 467.8 |
2. We calculated $6,537.6 million as UST’s enterprise value as of the end of 1998 by adding together UST’s market equity of $6,470.8 million and total debt of $100 million and subtracting cash of $33.2 million from this value. 3. Given the assumed growth rate of 3% and UST’s free cash flow in 1999 and enterprise value, we derived 10.16% as the WACC from the growing perpetuity formula: EV=FCFWACC-g → WACC= FCFEV +g 4. We derived 10.22% as the rA from the WACC formula: WACC=Ra 1-tD V.
In the presence of taxes, the WACC equals rA if the company is 100% equity-financed. Hence, instinctively, we can expect the WACC and rA to be closely equivalent in the case of UST due to its low leverage ratio of 1.52% prior to the recapitalization.
Once we have derived the rA, we re-calculated the WACC before and