Debt 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, it holds the maximum market share (77%) as a whole, and dominates especially in the growing segment of moist smokeless tobacco. Additionally, it has widely recognized brand and competitive positon in the market by constant innovation and new
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So, UST does not have advantage in geographical diversification as most cigarettes companies do.
Asset Tangibility
We can see from the following table, UST invested in non-core operation more and more. The total asset is increasing stably over the year from 1988 to 1998.
Litigation threat: probable liability obligations
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 environment makes the future cash outflows of UST risky.
The previous uncertainty is enhanced by a lawsuit that alleged that UST had violated antitrust and advertising laws and participated in anti-competitive conduct. Should UST lost the suite, it will be more vulnerable with competitors.
3-According to MM (if no taxes), does debt issuance matter? How about in the presence of taxes what are the pros and cons of debt?
The first preposition of Miler Modiglian principle states that; in an environment where there are no taxes exist, default risk or agency costs and capital structure are irrelevant. The value of a firm is independent of its debt ratio and the cost of capital will remain unchanged as the leverage changes.
Thus, Debt issuance will not
Accounts receivable (net) increased by $500,000 during the year. This increase has what effect on cash flow?
The decision making of management is very crucial and involves various analysis to be performed. There are various ratios and methods that can be useful for mitigating the risks and increasing the expected returns with investments. The financial forecast is a mix of the behaviour,
one at their widget making plant in Sudbury. The old widget maker has a current market value of
Tobacco consumption is the number one cause of preventable deaths in the United States. In the United States, cigarette smoking is responsible for more than 480,000 deaths per year. That is around one in five deaths annually only because of smoking. On an average, the person who smokes dies ten years earlier than a non-smoker. These statistics are not mere numbers but speak about the gravity of the situation. The United States government should portray a more negative view on Tabaco to save the lives of many people worldwide (Centre for Disease and Prevention, second paragraph).
Tobacco products are ever so threatening in the United States, where according to U.S. Food and Drug administration 25% of the deaths in men and women age 35 to 69 are caused from smoking related diseases (U.S. Food and Drug Administration, 2017). This number was even higher among substance abusers and people with mental health problems (Bandiera, Anteneh, Le, Delucchi, & Guydish, 2015, p.1). Even if someone does not die from smoking cigarettes they are at increased risk of contracting an otherwise preventable disease. Due to an exponentially growing amount of people becoming affected with diseases related to tobacco use, the United States government were forced to take action to try and stop the progression of these horrible diseases. These actions have come to no avail, since people who are addicted to cigarettes are not going to stop buying them just because of a price increase. Banning the production and distribution of tobacco products will contribute to a
Second City Options (SCO) is a small firm that specializes in option trading. Employing 35 people, SCO is located on LaSalle Street in the Chicago financial district. It is a member firm of the Chicago Board Options Exchange (CBOE), where it trades options on stocks and stock indices. It is also a member firm of the Chicago Mercantile Exchange Group (CME Group), where it trades options on futures and the underlying futures contracts.
From the Summary Financial information for UST Inc. Exhibit 3 showed that the compound annual growth per year has been decreeing in the past five years when comparing with the past ten years of Net Sales, EBIT and EPS. This due to the lawsuit, decrease consumer demand, increase in
Due to smoking people face heart and respiratory problems and therefore the consumption of tobacco products are declining in huge numbers as people are getting conscious about their health. Even passive smokers often have certain ailments. Tobacco companies are often taken to court by people for disciplinary or compensation. BAT also encountered with such kind of incidences, which might be a major cause for declination of revenues.
As the leading 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, market share still decreased by 1.6% over past 7 years. In addition, UST is also exposed to an unfavorable legislative environment, in which the company is under advertising and product promotion
Threats: RAI’s threats include lawsuits, increase in taxation, competition and product regulation. Over the years, there have been many lawsuits file because of deaths due to cigarette smoking. Litigation will continue to be a problem that the company must deal with. The company has to deal with the unknown of increased tobacco regulations by the U.S. Food and Drug Administration. This is a continued processed that a threat to any tobacco company due to the history of this industry.
3. Compare and contrast the two debt policy alternatives outlined in case Exhibit 8 for 1987. What bond rating would Du Pont receive under each alternative? How would its financial performance, financing needs, access to capital, and financial risk differ under the two alternative debt policies?
(5 points) In a world with no frictions (i.e., taxes, etc.), having debt is always better because it increases the value of the firm/projet.
6. Yes, we think that it is better for the society if companies use debt. This allows people who have extra funds and need to invest it to earn interest revenue on their funds. Debt is generally less risky than equity investing because as we know debt has certain maturity date and