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UST Optimal Capital Structure - MIT

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					                                           The Addition of Debt Increases the Value of UST




                       Debt as Percent of Pre-Restructuring
                                   Firm Value
                         0%       10%       20%       30%
Operating Income       $ 570 $ 570 $ 570 $ 570                                           Tax rate is 38%
Interest Expense       $   -    $    46 $      98 $ 161
Pretax Earnings        $ 570 $ 524 $ 472 $ 409
Taxes                  $ 217 $ 199 $ 179 $ 156                                         Debt is used to buy
Net Earnings           $ 353 $ 325 $ 292 $ 254                                       shares back at $30 each

Total Dividends        $     202   $     185   $     167   $     145
Shares Outstanding         210         189         168         147                   Dividends remain a fixed
                                                                                        percentage of EPS
Earnings / share      $ 1.68       $    1.72   $    1.74   $    1.73
Dividends as % of EPS $ 0.57       $    0.57   $    0.57   $    0.57
Dividends / share      0.96        $    0.98   $    0.99   $    0.98                     Market Equity =
                                                                                        Total Value - Debt
Market Equity          $ 6,300     $ 5,909     $ 5,519     $ 5,128
                                                                                          Stock Price =
Stock Price            $ 30.00     $ 31.27     $ 32.85     $ 34.89
                                                                                         Market Equity /
                                                                                      # Shares Outstanding
Debt                   $     -     $  630      $ 1,260     $ 1,890
Bond Rating                          AA           A          BBB                      Debt is assumed to be
Interest Rate               0      7.30%        7.80%       8.50%                     kept for perpetuity, so:
Interest Coverage          NA      12.39         5.80        3.55                       PV(Tax Shield) =
                                                                                     (Tax Rate * Debt * Rd) /
                                                                                                Rd
Value of Firm Unlevered $ 6,300    $ 6,300     $ 6,300     $ 6,300
PV(Tax Shield)          $   -      $   239     $   479     $   718                       Value Levered =
Value of Levered Firm $ 6,300      $ 6,539     $ 6,779     $ 7,018                      Value Unlevered +
                                                                                         PV(Tax Shield)
The Addition of Debt Increases the Value of UST
                                           UST Optimal Capital Structure

                                                                                                           Costs of
                $8,500                                                                               Financial Distress
                                                                                                     ( bankruptcy cost,
                                                                                                    monitoring benefits of
                $8,000                                                                              debt, issuance cost)


                $7,500


                $7,000
Value of Firm




                $6,500
                                                                                                           Value Levered
                                                                                                           Value Unlevered
                $6,000


                $5,500                                               Optimal Capital Structure (This
                                                                      optimal point is for illustrative
                                                                       purposes only. The actual
                $5,000                                               optimal point for UST may be

                $4,500


                $4,000
                         0%   10%   20%   30%      40%         50%   60%         70%         80%
                                                Debt / Value
                                           The Addition of Debt Increases the Value of UST




                       Debt as Percent of Pre-Restructuring
                                   Firm Value
                         0%       10%       20%       30%                40%        50%       60%        70%
Operating Income       $ 570 $ 570 $ 570 $ 570                          $ 570      $ 570     $ 570      $ 570
Interest Expense       $   -    $    46 $      98 $ 161                 $ 214      $ 287     $ 344      $ 467
Pretax Earnings        $ 570 $ 524 $ 472 $ 409                          $ 356      $ 283     $ 226      $ 103
Taxes                  $ 217 $ 199 $ 179 $ 156                          $ 135      $ 108     $ 86       $ 39
Net Earnings           $ 353 $ 325 $ 292 $ 254                          $ 221      $ 176     $ 140      $ 64

Total Dividends        $     202   $     185   $     167   $     145    $ 126      $ 100     $     80   $     36
Shares Outstanding         210         189         168         147       126        105          84         63

Earnings / share      $ 1.68       $    1.72   $    1.74   $    1.73    $ 1.75     $ 1.67    $ 1.67     $ 1.01
Dividends as % of EPS $ 0.57       $    0.57   $    0.57   $    0.57    $ 0.57     $ 0.57    $ 0.57     $ 0.57
Dividends / share      0.96        $    0.98   $    0.99   $    0.98    $ 1.00     $ 0.95    $ 0.95     $ 0.58

Market Equity          $ 6,300     $ 5,909     $ 5,519     $ 5,128      $4,738     $4,347    $3,956     $3,566

Stock Price            $ 30.00     $ 31.27     $ 32.85     $ 34.89      $37.60     $41.40    $47.10     $56.60

Debt                   $     -     $  630      $ 1,260     $ 1,890      $2,520     $3,150    $3,780 $4,410
Bond Rating                          AA           A          BBB         BBB        BBB       BBB    BBB
Interest Rate               0      7.30%        7.80%       8.50%       8.50%      9.10%     9.10% 10.60%
Interest Coverage          NA
Bond Rating                NA

Value of Firm Unlevered $ 6,300    $ 6,300     $ 6,300     $ 6,300      $ 6,300    $ 6,300   $ 6,300    $ 6,300
PV(Tax Shield)          $   -      $   239     $   479     $   718      $ 958      $ 1,197   $ 1,436    $ 1,676
Value of Levered Firm $ 6,300      $ 6,539     $ 6,779     $ 7,018      $ 7,258    $ 7,497   $ 7,736    $ 7,976
                   The Addition of Debt Increases the Value of UST




$   6,300   $   6,539   $   6,779   $   7,018   $ 7,258   $ 7,497    $ 7,736   $ 7,976
      0%        10%         20%          30%        40%        50%      60%       70%
$   6,300   $   6,300   $   6,300   $   6,300   $ 6,300   $ 6,300    $ 6,300   $ 6,300

				
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