Ust Case

UST will issue $1 billion of debt securities over five years to buy back stock. This additional debt will be added to the $100 million of debt securities UST ended 1998 with for a total debt of $1.1 billion, which UST will hold forever. We are assuming that $300 million of debt securities will be issued in each of the first two years (1999 and 2000) and $200 million in each of the following two years (2001 and 2002).

To determine the ability of UST to take advantage of the tax shield provided by the interest payable on the debt securities an 11-year forecast was created (refer to the Forecasted Income sheet of the attached Excel file). This forecast was also used to determine the future ratios the rating agents use to rate debt security issues. The following assumptions were made when preparing the forecast:

• Overall industry value market share would take 1.5 percent of market share from premium the market each year until the value market accounted for 30 percent of total market share

• UST would maintain its position as the premium leader

• UST’s advertising and promotions will help it gain market share in the value market

• UST would increase its position in the value market by 50 percent each year, maxing out at 42 percent

• Because of the pricing pressure from the increased percentage of sales from the value products, UST’s revenue will increase by only one percent going forward

• Historic annual increases of expense, depreciation, and cost of goods will continue in the future

• Medicaid settlement expenses will start at $10 million in 1999 and increase by $200,000 annually

• Any lawsuits settlements that occur in the future will be negligible, we are assuming the Medicaid settlement will limit future lawsuit

• The $100 million of debt is paying AAA rated 20-year rates

Based on the above assumptions we believe that the net income of UST will be gradually declining to $334 million in 2009. We do not believe...