1. How good is UST making?
* UST has been making highly good. Grosss and net incomes are turning at 9 % and 11 % severally. * Named by Forbes as one of the top companies in footings of profitableness. ROC. ROE and GPM one of the industry highest. * Paying back generous dividends of $ 2. 2b and buy backing $ 2b from 1988 to 1998. * However. they seem to be losing market portion in the premium market to rivals and have non been able to do an impact in the Price Value grade.
2. Main beginnings of hazard for UST hard currency flows?
* Pending health-related cases
* Legislation ( marketing limitations ) against the company could go on – New Torahs to halt baccy usage by immature people * Changing consumer wonts against baccy
* Increased competition from both premium and price-value manufacturers – USTs scheme is to establish similar merchandises to contend competition may non ever work as has been seen in the price-value section * The demand for smokeless baccy merchandises was minimum in international markets and merchandise enlargement outside USA for greater market section was non much of an option for UST. Consequently. a weak US economic system could impact domestic ingestion.
3. Remark on USTs capital construction. What might explicate such a construction?
* Entire Debt to Value is 17. 6 % which is low compared to the other Tobacco makers. * It is a mark that UST is able to bring forth healthy hard currency flows and map good with low degrees of debt. * On the other manus. it could besides be an indicant of non being able to place or take advantage of new growing chances.
4. Factors of import to recognition and bondholders in analysing UST? What recognition evaluation would you delegate to for a moderate add-on of debt?
Factors that may be of import to recognition and bondholders are
* Brand name and market place – Superior
* Ability to bring forth hard currency flows – Superior
* Cyclicality of grosss – Superior
* Product variegation – Poor
* Geographic variegation – Poor
* Litigation hazard – Poor
* Asset Tangibility – Good
Given USTs superior hard currency returns and low degrees of debt. I would probably delegate UST a A evaluation for their Long Term Debt issue as they are susceptible to judicial proceeding and altering consumer gustatory sensations.
5. Analyze Effects of $ 0. 5b and $ 1b in new debt and portion redemption. What happens to EPS?
Value of Levered house = Value of Unlevered Firm + PV ( Tax Shield ) – PV ( Financial Distress )
| Current| $ 0. 5 billion Plan| $ 1 billion Plan|
Stock Price| $ 36. 88| | |
Shares Outstanding| 185. 5| | |
UST Market Value| $ 6470. 8| | |
Debt| $ 100m| 500| 1. 000|
Shares Repurchased| | 13. 55| 27. 11|
Share Outstanding| | 171. 94| 158. 39|
PV of Tax Shield| 38 % | $ 190| $ 380|
Levered Value of UST| | $ 6660. 8| $ 6850. 8|
Net Income ( 5 % CAGR ) | $ 467. 9| $ 491. 3| $ 491. 3|
EPS| $ 2. 52| $ 2. 86| $ 3. 10|
6. Sum up costs and benefits of leveraging UST. Articulate an “optimal” capital construction. Should UST set about a major recapitalization?
* Increased hazard of Financial hurt
* Increased involvement payments
* Tax Shield
* Increase ROE
With UST foretelling small to no growing opportunities domestically and on board with their baccy merchandises. reconstituting its capital architecture with long term debt is the most assured method of maximising the firm’s value. However. taking on debt does increase the sum of hazard for bankruptcy. payment default. lower recognition evaluations. and decrease of dividends for UST and its stockholders.