Group Assignment 1 (UST)

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School

Cornell University *

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Course

690

Subject

Finance

Date

Jan 9, 2024

Type

pdf

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Leitner ACF2 Group Assignment (UST case) Please read the case “Debt Policy at UST” and answer the questions below. • To get a “complete,” your answers should be well-explained and only use information known at the time of the case. If you use information from AI, you should be explicit about that. • If your group contains more than one person, you should not say, “I think.” Instead, say something like “we think,” “our group thinks,” or “some group members think that …but other group members think that…” Questions: Consider a leveraged recapitalization in which UST borrows $1 billion, as in Lecture 3. Since UST already has $100 million of debt (Exhibit 3), the total debt will be $1.1 billion. Suppose the interest rate on the $1.1 billion debt will be determined according to the average yield on 10-year bonds in Exhibit 8. For example, if UST gets an A rating, the interest rate will be 6.12%, and the total interest payment will be 1.1b*6.12% = $67.3 million. 1. Assuming expected EBITDA will remain the same, what will UST’s EBITDA Interest coverage ratio be if it gets an A rating? Hint: Divide the EBITDA from Exhibit 5 by the interest payment, which was calculated above ($67.3 million). A high coverage ratio indicates that UST can make the promised interest payments. 1 2. Suppose the only criterion affecting UST’s credit rating is the EBITDA interest coverage ratio. Do you think that UST will be able to get an A rating? Based on Exhibit 8, the average EBITDA interest coverage ratio for an A-rated firm is 10. 3. On page 6, the case mentions some criteria that rating agencies will use to assign a credit rating for UST. Based on these criteria, do you think UST will get a higher or a lower rating than an average firm with the same EBITDA interest coverage ratio? Hint: I am looking for a qualitative answer, and there could be more than one “correct” answer, depending on your views. To get a complete, it is sufficient to include one (qualitative) argument in each direction and then form your opinion. You can ignore the other coverage ratios. 1 For more details, see the discussion of interest coverage ratios in BD: 2.6.

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