...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 has a relatively steep demand curve and should be considered as having an inelastic consumer demand. UST has products outside of its core operations in the wine and premium cigar market also. The company built itself strong brand name recognition over the years by providing premium products. Tobacco industry does not allow new competitors to enter the market due to strict legal regulations and advertisement bans. So, we can think that UST will hold its position in the market in the long run. Although for the past couple of years, UST faced market share erosion due to price-value brands which offer low priced products. UST have been criticized for lacking innovation and new product offering. The company also has lack of international (geographical) diversity. Also, there is a chance of a cultural shift against tobacco, and UST is unlikely to expand to international market We can say that; UST is in a good position in terms of brand name and market position, capability to generate...
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...the results of problem 2, we calculated the total value per share when firm borrows money to repurchase shares. From the calculation below, we can see that total market value of equity declined from 10,000 to 6,700, while total value per share rose from $10 to $11.70. Therefore, as the firm borrows and repurchases shares, the total value of equity declined, but the price per share rose. Assume that all the new debt is used to repurchase shares. Share price = (Total market value of equity + Cash paid out)/ Number of original shares Based on this assumption change, we will go through all the calculations one more time and estimate the impact of this change across the board. The table 5.1 contains various cost of debts based on various capital structures. In this table we estimate value of operations, value of debt, value of equity, stock price, net income and earnings per share of the firm for various capital structures. Our objective here is to identify the optimum capital structure for the firm. {draw:frame} Table 5.1 – Cost of Debt for various Capital Structures We used the Hamada equation to estimate the impact of the financial leverage on beta. This calculation is done in the table 5.2. The leveraged beta is utilized to estimate the true weighted average cost of capital (WACC) for various capital structures. Table 5.2 estimated the cost of equity, leveraged beta, weighted average cost of capital, free cash flow and the value of the assets...
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...Debt Policy at UST Inc.1. What are the primary business risks associated with USTInc.? What are the attributes of UST Inc.? Evaluate from theviewpoint of the bondholder. Over the years, UST has been a dominant producer in the tobaccoindustry, specifically the moist tobacco industry. Even though the paststrategy with UST has entailed raising the prices of its products on aregular basis, the company still shows signs of positive growth.Additionally, there have been recent issues with smokeless tobaccoproducts, such as lawsuits. However, there remains a constantconsumer demand for UST products. When evaluating the businessrisk of a company, one of the primary drivers of its business risk stemsfrom the price elasticity of its products. Thus, these are a few reasonsthat illustrate that the smokeless tobacco industry (UST’s mostdominant EBIT contributor) has a relatively steep demand curve andshould be considered as having an inelastic consumer demand. Also, itis important to note that UST has products outside of its coreoperations in the wine and premium cigar market. Also, UST hasintroduced products in the price value market as consumer demandhas 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 – poorObviously, the two most troubling business risks associated with USTare its litigation...
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...examine the view that the debt crisis is a result of inappropriate development policies. (40 marks) In 2008, the total external debt for the world’s developing countries was US$3.7 trillion, and US$163 billion for the worlds least developed countries For the developing world as a whole, in 1991, the total external debt was $1.362 trillion, which was 126.5%of its total exports of goods and services in that year, and the ratio of debt servicing to the gross domestic product of the developing world reached 32.4%. For some LEDCs, debt stood at 98% (Congo) and 112% (Nicaragua) of their GDP in 1980. Consequently, we have the situation whereby the last ten years African countries have paid their debt three time over, yet are three times as indebted as 10 years ago. This phenomenon is the result of international debt growing enormously since the 1970s, which became apparent in 1982 when Mexico announced it could not repay its foreign debt. Other, especially Latin American economies, also faced crises in the 1980s and 1990s, when they simply could not service their debt repayments: they defaulted. Mexico was first in 1982, Argentina in 1999-2002. Many other LEDCs continue to exist in a state of massive indebtedness, which persists until the present day. Inappropriate development policies, that is, the ineffective economic policies of many LEDC governments, did cause the debt crisis and indebtedness, but this is an incomplete explanation. Debt and debt crisis were also caused...
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...Debt Policy at UST Inc. Group #10 What are the attributes and primary business risks associated with UST, from viewpoint of a potential creditor (bondholder). Generally, UST is one of the most profitable companies in America. It is also the first and leading producer of smokeless tobacco. However, it still meet some risk. First of all, UST has seven current health related lawsuits. Secondly, UST didn’t has value opportunity to expand in international market. Finally, UST didn’t have an effective way to deal with the continued threat of price-value competitors. Rate the overall business risk In 1999, Debt Ratio = Total Liabilities/ Total asset=100/913.3= 10.95% D/E Ratio= Total liabilities/ Shareholders’ Equity= 100/ 468.3= 21.35% Why are they considering a leveraged recap after a long history of conservative debt policy UST wants to reduce the taxes paid and increase the firm value by leveraged recapitalization. Recapitalization can make capital structure of UST more stable, and sometimes to boost the company's stock price. Evaluate their past financial performance During 10 years, UST kept a good financial situation, which show a positive signal for shareholders an investors. This company was one of the most profitable companies because of good ROE, ROA and gross profit margin. Except decrease in earnings and cash flow in 1997, UST kept increasing in sales (10-year compound annual growth rate of 9%), Net income (11%) and Free operating cash flow (12%). UST also...
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...Term Papers and Free Essays Browse Essays 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, 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 flows of UST risky B. UST is a dominant player and market leader and its strategy is to combat entrants by launching similar products, rather than cutting prices. But the recent market erosion by small companies has raised concerns. And UST’s “counter attack” has not been effective in competing against price-value brands. The resignation of his CFO and President of tobacco unit further raise the uncertainty of the company’s efficiency of solving the market erosion problem. C. 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...
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...Debt Policy at UST The primary business risk facing UST in 1998 was that the U.S. tobacco industry itself was facing an uncertain future characterized by legal challenges, declining volumes, marketing restrictions, increased taxes, heavy discounting and consolidation. The U.S. smokeless tobacco industry also was transitioning away from the Premium Market and growing through the Price Value Market at a rate of 9%. Bondholders face very little investment risk given UST’s high interest coverage ratio and substantial cash flows, making UST less susceptible to the risk of bankruptcy. One would be concerned about the industry’s decline and the fact that growth is driven primarily by the Price Value Market. UST is positioned as the Premium Market leader, but owns just 6% of the Price Value Market. Of UST’s total portfolio of products, approximately 1% of the company’s 1998 tobacco sales revenue was derived from the Price Value Market. UST is facing aggressive pricing, heavy competition from new products and they are losing market share in their core operations. Their growth and pricing strategy was to introduce similar products rather than to cut prices. Further concerns are that UST has no plans to expand internationally, and both the CFO and President resigned in February 1997 due to “philosophical differences about the strategic direction of the company.” UST was facing growing threats of changes in legislation that could adversely affect the industry and faced several potential...
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...Harvard Business School 9-200-069 Rev. May 3, 2001 Debt Policy at UST Inc. In December 1998, UST Inc.’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program.1 For UST Inc., the leading producer of moist smokeless tobacco products and a company widely known for its conservative debt policy and high dividend payout (uninterrupted cash dividends since 1912), this announcement generated considerable attention on Wall Street. Investors eagerly awaited the subsequent actions of Vincent Gierer, Jr., UST’s Chairman and CEO. In 1997, UST had suspended its stock repurchase program, approved in 1996, because of legislative and legal issues confronting the tobacco industry.2 In November 1998, the company signed the Smokeless Tobacco Master Settlement Agreement resolving its potential state Medicaid liability and reinstated its repurchase program.3 Management believed that this agreement represented significant progress with respect to the legal and legislative matters confronting the company, permitting UST to proceed with its business strategy and potential recapitalization. The Smokeless Tobacco Market The U.S. smokeless tobacco industry generated $2 billion of retail revenue in 1998 with approximately 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total...
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...103% and GPM is 80%.EBITDA/Interest Coverage 105.6. UST is the first and leading producer of moist smokeless tobacco. UST has very conservative debt policy and stably growing free operational cash flows. Should UST undertake a billion $ recapitalization? Calculate the marginal (or incremental) effect on UST's value, assuming the entire recap is implemented immediately Yes, UST will be able to make interest payments and get a good (A) credit rating (EBITDA Interest coverage will be 829.37/70.5=11.7) and by issuing debt UST can increase the firm value through interest tax shield. Also issuing debt and recapitalization will increase the value of each share. The results of recapitalization are in the spreadsheet below. 1988 1999(no debt) 1999(after recapitalisation) Sales 1,423.20 1494.36 1494.36 Gross Profit 1,139.70 1191.00 1191.00 EBITDA 785 829.37 829.37 EBIT 753.3 796.49 796.49 Interest Expense 2.2 0 70.5 A Rating Pretax Earnings 755.5 796.49 725.99 Taxes 287.09 302.7 275.9 Net Income 468.4 493.8 450.1 Total Debt 100 0 1000 Shareholders’ Equity 468.3 468.3 Shares 185.5 185.5 158.2 Stock price 34.88 36.62 36.62 Market Value of UST 6470.24 6793.75 5793.75 Shares repurchased 27.304 P Value of the Tax Shield 380 Increase in firm value due to borrowing (P Value of the tax shield) = debt x tax rate=380...
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...memo is to show my understanding of the effects of debt on the value of a firm. To do this I will summarize results from problems 1-7. Problem One Problem one illustrates the effect on a company’s assets if additional debt is taken on. From my calculations debt effected the cost of equity and beta which in turn effected the value of the assets. When zero debt was held beta, cost of equity and the value of assets was .80, 10%, and $20,205. When the market ratio of debt and equity changes to 23% and 77% beta, cost of capital, and value of assets rose to .96, 11%, and $21,922. Finally when the ratio changed from 43% and 57% beta, cost of equity and the value of assets once again rose to 1.19, 12% and $23,639.97. Therefore when additional debt is taken on systematic risk and the risk for equity investors goes up while the company assets appreciates. Problem Two In problem two, the residual income valuation is used. This valuation shows the effect on the value of equity as the capital structure is changed. From this calculation, as the debt increase residual income decreases, cost of equity increases and the value of equity decreases. However the total value of debt and equity rises as the value of debt appreciates. Problem Three In problem three, pure business flows and financing effects are calculated. The purpose of these calculations is separate the two cash flows where pure business cash flows measure the value of debt to the company without the tax shield and the financing...
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...UNIVERSITY OF ZIMBABWE ASSIGNMENT CREDIT POLICY AND STARDARDS June 2014 Lecturer:Mr Samuel Gumbe Student: Rutendo Brian Mawoyo Question: With reference to your organisation or any that you are familiar with, outline the importance of a well articulated credit policy to the credit function. Background Credit is deferred payment and its control is an important feature of business management. In banks clients deposit their money. The bank lends out the money through a credit function. Deposits are collected at say x% and advanced at say x% plus 5% and 5% being the profit of advancing credit. This is how banks operate. Retail shops and wholesalers also sale goods on credit and this generally enables them to achieve higher margins and greater sales. Trade credit generally facilitates trade in the country and internationally. In all these some customers fail to pay back and there have to be effective, economic and efficient ways of recovering debts. Where credit sales or business constitute above 40% of total volume the importance of managing this function well becomes of paramount importance. Introduction Banks are in the business of receiving deposits and lending them out. Retailers, manufacturers and wholesalers offer trade credit. This process ties up money and at the same time these organisations have financial obligations to meet hence there has to be a balance. To achieve...
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...Summary of the Case Study Profits at the global banking group HSBC have fallen after it made provisions of more than $1.1 billion to cover losses from the economic crisis in Argentina. The Argentine crisis accounted for $1.12 billion of the write-down - which was slightly higher than analysts had forecast. The figures were in line with analysts' expectations and this helped push shares in HSBC 59p higher to close at 837p. Last year Argentina descended into chaos as people protested against draconian policies introduced to try and avoid default on overseas debt and devaluation of the peso. Eventually the pressures became too strong, and Argentina defaulted on its debts and floated the peso against the dollar. HSBC took a $520m charge to cover losses stemming from the change in value of the peso, and a general provision of $600m for losses in Argentina. Concerns about HSBC's exposure to the crisis in Argentina came to the fore yesterday as it emerged that its investment banking arm was preparing to lower its profits forecast for the company. HSBC Group's 2001 results, notably the economic crisis in Argentina and the related devaluation of the peso by the government which forced HSBC to book a US$1.12 billion charge. Argentina has been a major disappointment foe HSBC and they have a very talented team and all the necessary elements for success in a stabilised economy to have a profitable business. Nevertheless, the situation in Argentina remains both fluid and disturbing. The Argentine...
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...bad debts. Good credit management is vital to your cash flow. It is possible to be profitable on paper and but lack the cash to continue operating your business. Credit management tips It is best to minimise the likelihood of bad debts through good credit management practices. The following suggestions will assist you in preparing your own policies and procedures for credit management: Terms and conditions Clearly state in writing your terms and conditions of trade and your credit policy in writing. Draft terms and conditions that suit your business. It is strongly advised you seek legal advice before finalising the document to ensure it has internal consistency and covers all the key issues. It's also important to ensure the document does not contain any illegal terms and can be relied on in the event that court action is necessary to recover a debt. Include your terms on all quotes, estimates, contracts , agreements, purchase orders, and related documentation. Clearly specify what will be supplied, when the work will be done, and when and how payment is to be made. Obtain a written acceptance of the agreement along with written approval of any variations to the original agreement. Some terms and conditions to consider include, but are not limited to: * penalties for late payment – you must specify the exact fees and rate of interest; * ‘retention of title' clause where the seller retains title to the goods until payment is made; * your policy on returns...
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...its financing mix. In this case, the tradeoff between the costs and benefits of different leverage policies will be discussed. A simulation model was created by Diageo’s director of Finance and Capital Markets, Ian Simpson, and Adrian Williams, the firm’s Treasury Research Manager, to understand the tax benefits of higher gearing and the cost of financial distress. In this report, I will discuss the historical financial policies in Diageo. The actions of selling Pillsbury and spinoff of Burger King will be valued. And the tradeoff theory and Simpson and Williams’ simulation model will be studied and evaluated as well. Finally our conclusion is to choose interest coverage around 5. II. The Case Decision What recommendation would be made for Diageo’s future capital structure? Is Simpson and Williams’ simulation model reliable? III.Facts 1. Diageo was formed from the merger of Guinness and GrandMet. It was the seventh largest food and drink company in the world. 2. The firm was organized along four business segments: Spirits and wine business, Guinness Brewing, Packaged and fast food. 3. Prior to the merger, both of the two companies had quite conservative financial policies. The bonds rating of the two companies were AA and A. 4. After the merger, management chose to retain the policies of the merged companies. The rating agencies confirmed the firm’s debt would be rated A+. 5. Diageo’s interest coverage ratio was maintained from 5 to 8. 6. Since 1997...
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...4. A split limit policy pays a certain amount for each injured person and a total amount per incidence for all injured people. This type of policy is stated in three numbers: 50/100/50. The first of the three numbers, $50K, is the maximum amount that will be paid for bodily injury to each person in the case of an accident. The second number, $100K, is the maximum total amount that will be paid to all persons for each accident. It is important to remember that the second number is a cap for the first number. For example, let’s say are three people in the accident and the first has a bodily injury of $30K, the second has a bodily injury of $40K, and the third has a bodily injury of $40K. In this situation, the first person will be paid the full $30K since it is under the limit for each person, the second will also be paid the full $40K since it is under the limit for each person, and the third will only be paid $30K out of $40K even though $40K is under the limit for each person since the maximum amount for the accident, 100K, has been reached. So, the third person may have to pay $10K out of their pocket. The third and last number, $50K, is the maximum total amount available to pay for property damage for each accident. The $500 deductible means that before the insurance company pays anything, the insured must pay the $500. In other words, the deductible is the minimum amount that must be paid by the insured in order for the insurer to settle the rest of the claim. The minimum...
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