Sep) UST Inc. is considering a debt-for-equity recapitalization. In the deal‚ UST will issue $1 billion debt to buy back stocks. In class we argue that an important determinant of a firm’s debt policy is the tradeoff between the tax benefits of debt and the costs of financial distress and bankruptcy. Mature firms generating positive and stable operating income are more likely to take advantage of the debt tax shields and less likely to verge on bankruptcy‚ and thus may consider using more debt in
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Debt Policy at UST 1. How well is UST doing? * UST has been doing extremely well. Revenues and earnings are growing at 9% and 11% respectively. * Named by Forbes as one of the top companies in terms of profitability. ROC‚ ROE and GPM one of the industry highest. * Paying back generous dividends of $2.2b and repurchasing $2b from 1988 to 1998. * However‚ they seem to be losing market share in the premium market to competitors and have not been able to make an impact in the
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UST Case Study Steven Kinyon Phillip LeCheminant Ryan Makahilahila 1. UST has a long history of conservative debt policy. Briefly describe why UST is considering a recapitalization that involves issuing debt and repurchasing equity. UST has a long history of a conservative debt policy. However‚ in 1998 they reinstituted their share buyback program. This means that they intended to issue up to $1 billion in debt in order to repurchase equity. Their intentions in repurchasing equity are to maximize
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MEMORANDUM TO: UST Inc. Investors CC: FROM: DATE: SUBJECT: Debt Policy at UST Inc. ADD INTRO PARAGRAPH From the viewpoint of the bondholder‚ UST Inc. has various attributes that make the company a safe‚ yet sometimes risky investment. Qualities that make UST Inc. a superior investment include their excellent A-1 credit rating and their strong brand name and market position‚ which has made UST Inc. one of the most profitable companies in corporate America. While their asset tangibility
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Summary UST Inc. has historically been one of the most profitable companies. Profitability stems from its commanding market share‚ strong name brand recognition‚ historical pricing flexibility‚ and growing smokeless tobacco demand. However‚ UST faces business risks including eroding market share‚ tobacco lawsuits‚ and reduction in innovation. UST Inc. is considering a leveraged recapitalization to help in shielding the tax‚ increasing the share price and eliminating idle cash and debt
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UST Company UST Company is a retail company located in Hong Kong. This case contains information about the company’s accounting records and activities for 2016. The owner of the company has asked you to use this information to generate the company’s 2016 financial statements according to the International Financial Reporting Standards (“IFRS”). Requirements: A. Create an accounting equation worksheet for UST Company. This worksheet should include all the accounts listed in the company’s chart of
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EMBA 8500 #1 Book value of debt Book value of equity Market value of debt Market value of equity Pretax cost of debt After Tax cost of debt rd Market value weights of: Wd Debt We Equity bL Levered beta Rf Risk-free Rate Market Premium RM Ke Cost of equity WACC EBIT - Taxes (34%) EBIAT + Depreciation - Capital expense Change in Net Working Capital Free Cash Flow Value of Assets ( FCF/WACC) CASE # 31 0% Debt 100% Equity $ $ 20‚000 $ $ 20‚000 7.0% 4.62%
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1. What are the benefits of debt for UST? How do you calculate the value of these benefits? Use a corporate tax rate of 38% to value the tax shields. The benefits of debt to UST are to create an interest tax shield. The interest tax shield directly increases the cash flows paid to equity investors. The present value of that interest tax shield increases the market value of UST as a leveraged firm vs. an unleveraged one‚ if they choose to recapitalize. The value of these benefits is calculated
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that the primary business risks associated with UST Inc. include but are not limited to: litigation‚ poor diversification of product lines‚ resignation of two key executives‚ lack of innovation and timeliness of new products‚ and erosion of market share due to competitors. Aside from the risks‚ UST has several key attributes that set them apart from other companies. UST continues to be a top company relative to the smokeless tobacco industry and other industries in terms of profitability and has
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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‚ tobacco demand is considerably inelastic) It is the (sub)industry leader (market share >85%)‚ industry is an oligopoly which implies high barriers for potential competitors to enter the market
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