Question 1 : In 1998, when UST Inc. announced its $1 billion levered recapitalization, its business was growing more mature. Indeed, its unsuccessful attempts to diversify into other sectors seemed to suggest a lack of profitable investment opportunities. Based on this, can you think of any (agency-related) benefit associated with UST's levered recap?

Question 2 : You are valuing a levered firm that would face non-negligible costs in case of default. The firm plans to reduce its debt level according to a fixed schedule for the next 5 years, and then to keep it stable afterwards. Which DCF valuation method would you opt for, the WACC or the APV method? Motivate your answer.

Question 3 : Why should firms have a pecking order of financing sources when managers have more information about the firms they run with respect to financiers? In answering the question, explain why debt is referred to as a less information-intensive security than equity.