Debt Policy at Ust Essay - 1230 Words

Debt Policy at UST Inc. 1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of a bondholder. (Your answer should be more qualitative than quantitative!) The following factors weave into the risks and attributes of the company from the creditors’ point of view: A. UST had seven pending health related lawsuits at the end of 1998. The outcomes of these suits are uncertain. Despite the major Medicaid state settlements, lawmakers are expected to continue to push for new laws to combat youth tobacco use. Other litigation against tobacco companies is expected to continue, especially suits filed by individuals. This uncertain litigation and legislative†¦show more content†¦Now they want to be more aggressively levered since the chance of bankruptcy is rather low. B. Presumably, the company managers are also shareholders. The recapitalization helps to decrease the total shares outstanding, thus increases the relative percentage owning of the remaining shareholders. Consequently, the insiders will have more weights on the voting of the major policies of the company. Since the value players form a major competing force with UST, in the foreseeable future, UST might choose to lower the price of its products. But his is not in the favor of the stockholders who are looking for short-term income as opposed to long term capital gain. In order for such decisions to pass, the management team has to upgrade their own weights by buying back some of the outstanding stocks through issuing debt. C. UST wants to signal to shareholders that it still commits to provide generous dividend returns. By issuing more debt and repurchasing stock shares, UST can increase the upfront stock dividend paid to shareholders (Note that whether UST can maintain its dividend policy is the issue discussed in question 4). Although this will not affect the decision of rational investor because by increasing its leverage the investment is also riskier, the higher dividend will appeal to irrational investors and quick cash seekers. 3. Should UST Inc. undertake the $1 billionShow MoreRelatedDebt Policy at Ust641 Words   |  3 PagesDebt Policy at UST The primary business risk facing UST in 1998 was that the U.S. tobacco industry itself was facing an uncertain future characterized by legal challenges, declining volumes, marketing restrictions, increased taxes, heavy discounting and consolidation. The U.S. smokeless tobacco industry also was transitioning away from the Premium Market and growing through the Price Value Market at a rate of 9%. Bondholders face very little investment risk given UST’s high interest coverage ratioRead MoreDebt Policy at Ust Inc.1263 Words   |  6 Pagesmanufacturer in the moist smokeless tobacco industry, UST Inc. has long been recognized by its ability to generate high profit using low financial leverage. With a dominant market share of 77%, the company maintains a pricing power that allows it to institute annual price increases without losing costumers. However, UST’s market share was eroded significantly in recent years by price-value competitors who enter the market with lower prices. Although UST responded to these threat by introducing new productsRead MoreDebt Policy at Ust Inc.2208 Words   |  9 PagesDebt policy at UST inc. Case To: UST Board of Directors From: UST Financial analysis team Date: 18 January 2011 Subject: Future debt policy at UST and recapitalization option 1. Analysis of UST business current and future environment UST operates in the smokeless Tobacco industry, a market with 2 B$ of revenues, which grew at a CAGR of 3.7% over the past 17 years, but more recently experienced a decrease in growth rate, dropping to 2.9% in 1997 and 1.2% in 1998. In this market, USTRead MoreCase study: Debt Policy at UST Inc.1853 Words   |  8 PagesFIN 5204 MANAGING CORPORATE CAPITAL INVESTMENT AND CAPITAL STRUCTURE FALL 2007 DEBT POLICY AT UST INC. 1. WHAT ARE THE PRIMARY BUSINESS RISKS ASSOCIATED WITH UST INC.? WHAT ARE THE ATTRIBUTES OF UST INC.? EVALUATE FROM THE VIEWPOINT OF THE BONDHOLDER. Over the years, UST has been a dominant producer in the tobacco industry, specifically the moist tobacco industry. Even though the past strategy with UST has entailed raising the prices of its products on a regular basis, the company still showsRead MoreCase Study on Ust1692 Words   |  7 Pages1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of credit analyst or bond holder. UST Inc. is a smokeless tobacco company with a long tradition and a recognizable brand name. A strong brand name can have lots of associations with high quality, revenues, soundness, growth, etc. But, this is one of the characteristics that can be like two edged sward. On one side, company with long tradition is expected toRead MoreUST Case Solution Essay1320 Words   |  6 Pagesconsidered. Required debt rate and pro forma income statement Risk determinants Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in termsRead MoreUst Case Solution1383 Words   |  6 Pagesconsidered. Required debt rate and pro forma income statement Risk determinants Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in termsRead MoreFinancial Industry1865 Words   |  8 PagesDebt Policy at UST Case Questions Group members: Wei-Ting Liao; Cong Ren; Gerald Nyiti; Beidan Wang 1- ) Give a brief summary of the company background UST Inc. is a smokeless tobacco company which enjoyed a long tradition and a recognizable brand name. It is the leading producer of moist smokeless tobacco products and widely known for its conservative debt policy and uninterrupted cash dividend payout since 1912. The company is the major player in U.S. smokeless tobacco market. For example,Read MoreUst Inc2284 Words   |  10 PagesDebt Policy at UST, Inc. Introduction In 1998 the U.S smokeless tobacco industry generated $2 billion of retail revenue with approximately 5 million consumers of moist tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total. The factors contributing to the continuous growth of the moist smokeless tobacco was the increased prevalence of smoking bans which had led customers to switch to smokelessRead MoreUst Case Study2113 Words   |  9 Pages| Group Assignment 1 | UST Case Study | 2/19/2013 | | | | Question 1: In order to calculate the impact of the leverage recapitalization on UST’s value, we used the WACC and APV methods to calculate its value before and after the recapitalization. WACC Method Using the WACC method, we first derived UST’s return on assets (rA). Since we are given the firm’s market capitalization, debt and cash, we calculated the current Enterprive Value of UST. We were then able to derive