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EXHIBIT 1: UST FINANCIAL DATA EXHIBIT 2: TO

1994 1995 1996 1997 1998 Philip Morris


Income Statement
Net sales 1,204.0 1,305.8 1,371.7 1,401.7 1,423.2 74,391.0
Sales growth 9.7% 8.5% 5.0% 2.2% 1.5% 3.2%
EBITDA 668.9 736.9 779.2 749.8 785.0 15,501.0
Depreciation and amortization 28.2 29.1 28.3 30.5 31.7 1,690.0
EBIT 640.7 707.8 750.9 719.3 753.3 13,811.0
Interest expense 0.1 3.2 6.4 7.5 -2.2 890.0
Earnings before tax (EBT) 640.6 704.6 744.5 711.8 755.5 12,921.0
Taxes 253.1 274.8 280.5 267.9 287.6 5,248.6
Net income 387.5 429.8 464.0 443.9 467.9 7,672.4
Balance Sheet
Cash and Cash Equivalents 50.7 69.4 54.5 6.9 33.2 4,081.0
Other assets 690.5 714.6 752.1 819.5 880.1 55,839.0
Total assets 741.2 784.0 806.6 826.4 913.3 59,920.0
Debt 125.0 200.0 250.0 110.0 100.0 14,662.0
Other (non-debt) liabilities 254.5 291.2 275.4 279.6 345.0 29,061.0
(Book) equity 361.7 292.8 281.2 436.8 468.3 16,197.0
Total liabilities and equity 741.2 784.0 806.6 826.4 913.3 59,920.0
Stock Price Data
Year-end stock price 27.88 33.38 32.38 36.94 34.88 53.50
Price/Earnings Ratio 14.5 15.1 13.1 15.3 13.8 16.9
Market equity 5,631.8 6,489.1 6,068.0 6,793.3 6,470.2 129,951.5
Earnings and Payout
Shares outstanding 202.0 194.4 187.4 183.9 185.5 2,429.0
Earnings per Share (EPS) 1.92 2.21 2.48 2.41 2.52 3.16
Dividend per Share (DPS) 1.12 1.30 1.48 1.62 1.62 1.68
Dividends 226.2 252.7 277.4 297.9 300.5 4080.72
Dividend payout ratio 58% 59% 60% 67% 64% 53%
Share repurchases 298.8 274.8 237.8 45.7 151.6

QUESTION 1.

QUESTION 2.

UST Philip Morris N.A.T. RJR Nabisco DiMon Std Com. Universal
EBITDA margin
EBIT margin
Net margin
Return on Equity (ROE)
Return on Assets (ROA)

QUESTION 3.
QUESTION 4.

UST Philip Morris N.A.T. RJR Nabisco DiMon Std Com. Universal
Liabilities/Assets
Debt/Assets
Net debt/Assets *
Liabilities/Firm value **
Debt/Firm value
Net debt/Firm value
Debt/EBITDA
Coverage ratio
* Net debt = Debt − Cash and cash equivalents ** Firm value = Liabilities + Market equity

QUESTION 5.

Recap Amount 0 1,000 2,000


Book equity pre-recap 468.3 468.3 468.3 Book value of equity before the recap is announced
Number of shares pre-recap 185.5 185.5 185.5 Number of shares outstanding
Stock price pre-recap 34.88 34.88 34.88 1998 year-end stock price
Market equity pre-recap 6,470 6,470 6,470 = Number of shares × Share price pre-recap
Debt pre-recap 100 100 100 Debt (book) value before the recap is announced
Firm value pre-recap 6,570 6,570 6,570 (Market equity + Debt) before the recap is announced
Tax rate 38% 38% 38% Corporate tax rate
New debt - 1,000 2,000 Amount borrowed in the recap
Value of tax shield created = Tax rate × New debt
Firm value post recap = Firm value pre-recap + Value of tax shield created
Debt post-recap = Debt pre-recap + New Debt
Leverage ratio post-recap = Debt post-recap/Firm value post-recap
Market equity post-recap = Firm value post-recap − Debt post-recap
Book equity post-recap = Book equity pre-recap − Total repurchase
Total repurchase - 1,000 2,000 = Amount paid out in the repurchase
Market equity at announcement = Market equity post-recap + Total repurchase
Stock
Number price at announcement
of shares = (Market equity/Number of shares) at announcement
repurchased = Total repurchase/Stock price at announcement
Number of shares post-recap = # shares pre-recap − # shares repurchased
Stock price post-recap = (Market equity/Number of shares) post-recap
Debt rating post-recap AAA AA BBB Inferred from corporate bonds statistics
Interest rate 5.85% 6.9% 9.1% Inferred from the yield of same-rating corporate bonds
EBIT 768.4 768.4 768.4 = (1+2%)×EBIT98(=753.3)
Interest expense = Interest rate × Debt post-recap
Earnings before tax (EBT) = EBIT − Interest expense
Tax = Tax rate × EBT
Net Income = EBT− Tax
Return on Equity (ROE) = Net income/Book equity post-recap
Earnings per share (EPS) = Net income/Number of shares post-recap

QUESTION 6.

Makes debt more attractive


and cash less attractive
than for the average business?
GENERIC FACTORS What about your company? No! OK
PRO1. Taxes: Do ITS make
debt attractive?

PRO2. Discipline: Is over-


investment a risk?

CON1. Main Business


Risks: Demand? Rivalry?
Techno? Regulation?
Political? Etc.
CON2. Cost of Financial
Distress: Business
disruption if struggling for
funds
Investment: Large,
inflexible needs

Assets: Hard-to-
value/redeploy, intangible

Rivals: Can they hurt you if


you're down?

Customers: Durable good,


warranties, etc.

Suppliers: Do they care if


you're distressed?

Employees: Human capital-


intensive?

Management: Will they


fold?
ADDITIONAL QUESTION (IF YOU HAVE TIME)

Present Value of Tax Shield (PVTS) Annual Discount PV


(all amounts in millions of USD) Year E(interest expense) tax saving factor (annual tax saving)
Debt amount ($m) 1,000 1 100 38 0.909 34.5
Expected interest rate 10% 2 100 38 0.826 31.4
Corporate tax rate 38% 3 100 38 0.751 28.5
4 100 38 0.683 26.0
5 100 38 0.621 23.6
EXHIBIT 2: TOBACCO COMPANIES 1998
N.A.T. RJR Nabisco DiMon Std Com. Universal

93.1 20,563.0 2,171.8 1,492.8 4,287.2


10.2% -0.5% 2.2% 10.2% 4.2%
36.3 3,602.0 200.2 85.8 329.5
7.2 1,135.0 43.5 20.5 51.1
29.1 2,467.0 156.7 65.3 278.4
24.9 880.0 83.8 37.8 64.0
4.2 1,455.0 72.9 37.1 231.3
3.2 737.0 20.9 10.2 100.9
1.0 718.0 52.0 26.9 130.4

2.8 300.0 18.7 34.1 79.8


257.2 28,592.0 1,778.8 805.4 1,976.9
260.0 28,892.0 1,797.5 839.5 2,056.7
215.6 10,467.0 1,079.5 469.9 849.6
59.8 10,616.0 296.1 220.0 659.2
-15.4 7,809.0 421.9 149.6 547.9
260.0 28,892.0 1,797.5 839.5 2,056.7

NA 29.69 11.25 15.94 37.38


NA 13.4 9.6 7.3 10.1
NA 9,616.6 500.6 197.7 1,315.8

528.2 323.9 44.5 12.4 35.2


0.00 2.22 1.17 2.17 3.70
0.00 2.05 0.66 0.00 1.11
0 663.995 29.37 0 39.072
0% 92% 56% 0% 30%

Peers Peers mean


median
Peers Peers mean
median

ecap is announced

ap is announced
e recap is announced

f tax shield created

al repurchase
res) at announcement
announcement

res) post-recap

ating corporate bonds


Makes debt more attractive
and cash less attractive
an for the average business?
Yes! ?
PV
(annual tax saving) PVTS
34.5 34.5
31.4 66.0
28.5 94.5
26.0 120.5
23.6 144.0