Debt Policy Ust Inc Pdf
Ad& amp d 2nd edition skills and powers character sheet answers. FIN 5204 Managing Corporate Capital Investment and Capital Structure Fall 2007 Debt Policy at UST Inc. What are the primary business risks associated with UST Inc.?
The adjustment of the matter is the recent decision of the UST to significantly change its policy of debt by borrowing $ 1 billion to fund its share repurchase program. By Mark Mitchell Source: HBS Premier Case Collection 14 pages. May 10 2000: release date. Prod #: 200069-PDF-ENG Debt Policy at Case Solution UST, Inc. Debt Policy at UST Inc. Case Solution, Tax, Inc., is a very profitable smokeless tobacco company with low debt compared to other companies in the tobacco industry. The setting Tax recent decisio Home.
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 shows signs of positive growth. Additionally, there have been recent issues with smokeless tobacco products, such as lawsuits. However, there remains a constant consumer demand for UST products. When evaluating the business risk of a company, one of the primary drivers of its business risk stems from the price elasticity of its products. Thus, these are a few reasons that illustrate that the smokeless tobacco industry (UST’s most dominant EBIT contributor) has a relatively steep demand curve and should be considered as having an inelastic consumer demand. Also, it is important to note that UST has products outside of its core operations in the wine and premium cigar market.
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Also, UST has introduced products in the price value market as consumer demand has increased. Brand name and market position - superior Cash flow generating capacity- superior Cyclicality of revenues - superior Product diversification - poor Geographic diversification - good Asset tangibility - good Litigation Risk – poor Obviously, the two most troubling business risks associated with UST are its litigation and product diversification risks. The smokeless tobacco industry will always face potential lawsuits because of the ongoing health concerns. Also, even though UST has diversified into other markets (wine and cigars), these products are very minimally attributing to UST’s EBIT. Nevertheless, UST products have a steady demand for their products, they produce positive cash flows year-toyear, and the company has a dominant market position and brand name with regard to their core business. For these reasons, it is determined that UST has a relatively low business risk. Discuss UST’s past financial performance.
Is the past performance expected to continue in the future? UST Historical Financial Performance 5-year CAGR 10- year CAGR Net Sales 5% 9% EBIT 6% 11% EPS 9% 13% 5-year Average 10- year Average Gross Profit Margin 79.7% 77.3% Net Margin 32.7% 31.3% ROE 122.8% 89.1% Dividend Payout 61.6% 57.8% The historical financial data indicates that that compound annual growth per year has been declining in the past five year compared with the past ten years in Net Sales, EBIT, and EPS. Obviously, this is a sign of UST slowing down its financial performance due to factors such as an increase in competitors, less consumer demand, etc.
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Nevertheless, it is comforting that within the past five years, the operating data is generally not moving backwards and is still growing (at a much slower rate). When analyzing the 5-year and 10-year averages, the data indicates that UST financials are still steady and increasing. Exhibit 2 suggests that the market share of UST has been slowly decreasing over the past 7-years. Due to the fact that there has been increased competition in the premium smokeless tobacco market, UST is losing market share with products in its core operations. Furthermore, the price value products in the industry are showing a dramatic increase in market share, yet UST only shows a 0.6% market share in 1998 (late mover).
For these reasons, UST needs to focus their efforts on attracting the growing demand with the price value smokeless tobacco products in order to strengthen their long-term financial performance. Thus, because of the increased competition in the smokeless tobacco industry, UST has to constantly look for innovative ways in order for them to be a driving force in the smokeless tobacco industry. (a) Compare UST’s financial performance and capital structure to other tobacco firms. Exhibit TN-3 Summary Financial Information for UST and other Tobacco Companies Debt/Book Cap (%) 17.6 Debt/Market Cap (%) 1.5 EBITDA/Interest coverage(x) Corporate Credit rating 105. 3 3.0 0.4 2.4 12. 0 NA 54.4 71. 3 3.7 3.3 72.
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4 1.1 46.2 12. 3 3.5 2.4 NM 8.4 1.6 Median (exUST) ROA (%) 103. 4 53.8 Universal ROE (%) CommercialStandard 32.9 9.7 Dimon Net Margin (%) RJR Nabisco 80.1 North Atlantic Gross Profit Margin (%) Phillip Morris UST USTs margins were far superior to all of its competitors; its growth 2.7 B+ BBB BB BB- ANM + margin was 2.9x the industry median and its net margin was12x the median. USTs ROE was an astonishing 103.4% and its ROA is equally impressive at 53.8% compared to a 3.1% median. Its debt/book capitalization and debt/market capitalization is 3.7x and 32x lower than the median respectively. Its interest coverage of 105.6 xs is 25 xs more than the industry median. (b) Why is Wall Street concerned about USTs future prospects leading to a “neutral rating” on the company?