FIN 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 shows
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manufacturer 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 products
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Debt 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‚ UST
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market share in the smokeless tobacco industry‚ UST Inc. has been generating large and stable income. However‚ the leading company in a certain industry tends to react slowly to market share erosion by competing firms and lack of creativity in the introduction of new product‚ a situation UST Inc. is now undergoing. Concerning the declining sales growth and gradual loss of the market share‚ UST Inc. is now considering recapitalizing by issuing debt amounts to $1 billion. By recapitalizing‚ it can
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Case 1 – Debt Policy at UST Inc. 1) UST is the dominant producer of moist smokeless tobacco‚ or moist snuff‚ controlling approximately 77% of the market. UST has been one of the most profitable companies in corporate America with low debt compared to other companies in the tobacco industry and the company has been recognized by Forbes in terms of profitability by achieving return of capital of 92.1%. Price elasticity of its products is also important while evaluating. Smokeless tobacco industry
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Debt Policy at UST Inc. Executive Summary In the 1990’s‚ UST was a dominant producer of moist smokeless tobacco‚ controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf‚ plug and twist/roll) categories. UST was a market leader of the snuff product category‚ innovating with new product forms and flavors over the years. UST has also been a profitable company‚ boosting its shareholders’ earnings by undertaking measures such
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Introduction: The case “Debt Policy at UST Inc.” deals with the progressively lowering growth and the company’s board decision to borrow up to $1 billion over five years to accelerate its stock buyback program. The case talks about how the company has seen its commanding market power decline over the years due to price challenge from smaller companies and has been experiencing slow growth rates due to lack of innovation in recent years. The investors had concerns regarding the future of the company
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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
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Question 1 How would you characterise the economics of UST business? What are the primary business risks associated with UST [Hint:Compile a list of factors that a credit analyst would take into account when evaluating the proposed recapitalisation]? UST is a principal producer of moist smokeless tobacco products‚ controlling roughly 77% of the overall market. It has $913.3m of assets of which tobacco accounts for 54.5%. The net income for UST has been growing at 11% compounded annual growth rate
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Debt Policy at UST Attributes and Risks of UST UST is the market leader in the moist tobacco segment. In a struggling tobacco industry‚ UST has shown consistent growth over the past few decades. Despite the decrease in demand for smoked (cigarette) tobacco‚ there is a growing demand for UST’s products. The perception that smokeless tobacco is healthier than smoked tobacco has helped the company to build a strong customer base. Therefore‚ despite some legislative setbacks‚ the company is growing
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