Assume a 38% tax rate and a 10% discount rate when discounting future dividends. Assume that the new debt is constant and perpetual and that the buyback operation is unexpected by

stock market participants. 1) What are the primary business risks of UST? Evaluate them from the point of view of a bondholder. 2) Why is UST considering a leveraged recapitalization after such a long history of conservative debt policy? 3) Should UST undertake the $1bn recapitalization? Prepare a pro-forma income statement for 1999 to analyze whether UST will be able to make interest rate payments. How sensitive is your conclusion to the rating UST bonds receive?