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?