However, this might not be the best solution. First, legal challenges will cause litigation expenses, lawsuits expenses and settlement payments, which will decrease the operating income and cash flow and will increase the risks of debt default.
UST is threatened by value competitors who cut prices to compete. However, these risks are relatively low given the strong operational result of UST. However, financial situation of the firm plays a very important role in the decision of the bondholder and this company has been one of the most profitable companies America in terms of ROE, ROA ad gross profit margin.
On one side, company with long tradition is expected to to operate in a stable and prosperous way as it always did, but on the other side, company itself can get too self confident and fail to see the newcomers and other threats.
Two choices were analyzed: At each debt level, try to estimate what bond rating the UST debt would have and what interest rate that would correspond to. Use the data on bond ratings and key financial ratios as a guide.
The US tobacco industry is characterized by declining volumes, legal challenges, marketing restrictions, taxes, discounting and consolidation, and so the long-term view is not so clear. A strong brand name can have lots of associations with high quality, revenues, soundness, growth, etc.
And UST also faces a pending dispute over antitrust violation. This can be a negative aspect for the company, since the lawsuits against tobacco industry are mounting and are increasing threat for the company. But, this is one of the characteristics that can be like two edged sward.
Why is UST Inc. What are the attributes of UST Inc.? Companies that do not want to become hostile takeover targets might undergo a recapitalization by taking on a very large amount of debt, and issuing substantial dividends to their shareholders this makes the stock riskier, but the high dividends may still make them attractive to shareholders.
The existing litigation-related settlement obligations of UST include: They are generating their cash flows out of the operations. At each debt level, estimate the benefits of debt. Prepare a pro-forma income statement to analyze whether UST will be able to make interest pay-ments. Assume that if UST issues debt, it uses the proceeds to buy back equity.
From the industry level, the smokeless tobacco manufactures have faced less exposure to health related lawsuits than cigarette manufactures because the scientific evidence linking smokeless tobacco to cancer is less conclusive than those on cigarettes.
For example, should management worry about the possibility of bankruptcy? The company does not have any problems with its cash flow. Thanks to their premium pricing, they are achieving more than average gross profit margin.
Costs of debt stem from the increase in the probability of the firm defaulting. Will a recapitalization issuing debt and buying back equity with the proceeds hamper future dividend payments?
Inthe tobacco industry experienced some developments in the legal arena which the industry viewed positively. What are the primary business risks associated with UST Inc.?
Second, the intensifying competition could affect the operating income and cash flow and will increase the risks of debt default.
What are the costs of debt? What interest rate do you expect UST to have to pay at these various debt levels? It can be expected that litigation and legislation targeting the tobacco manufacturers will continue.
Forecasts are positive 2.
In order to answer the question, I calculated if financing through debt was the right choice.USTs ROE was an astonishing % and its ROA is equally impressive at % compared to a % median. Its debt/book capitalization and debt/market capitalization is x and 32x lower than the median respectively.
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UST Case Study Essay Sample. 1. Assess the business and financial risks of UST. Business risks are relatively low: Main risk is that UST has undiversified business, it basically relies on one product However its main product is noncyclical, it carries little systematic risk Imminent increase in excise tax on smokeless tobacco (however.Download