Case2Team4 v4

8/9/2019 Case2Team4 v4

1/8

Case 2FIN500

Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones, ale !lu"anmi

Debt Policy at UST Inc.

Executive Summary

In the #$$0%s, &ST 'as a dominant p(odu)e( o* moist smo"eless toba))o, )ont(olling ++ o* the

ma("et- Smo"eless toba))o p(odu)ts )onsist o* snu** .d(/ and moist and )he'ing toba))o .loose lea*,

plug and t'ist1(oll )atego(ies- &ST 'as a ma("et leade( o* the snu** p(odu)t )atego(/, innoating 'ith

ne' p(odu)t *o(ms and *lao(s oe( the /ea(s- &ST has also been a p(o*itable )ompan/, boosting its

sha(eholde(s% ea(nings b/ unde(ta"ing measu(es su)h as in)(easing the )ost o* its p(odu)ts steadil/ 'ith

time- &ST also bene*ited *(om the stead/ in)(ease in ma("et demand *o( smo"eless toba))o gien the

(ising (est(i)tions on )iga(ette se)ond hand smo"e- &ST 'as still )(iti)i3ed at the time *o( its ta(diness

'ith ne' p(odu)t int(odu)tions and losing its ma("et sha(e to ne' and smalle( )ompetito(s- In #$$+,

instead o* )utting p(odu)t p(i)es to )ompete, &ST int(odu)ed ne' line o* lo'e( p(i)ed p(odu)ts su)h as

Copenhagen ong Cut and ooste(- &ST also (ene'ed its *o)us on the ma("eting )ampaigns, laun)hing

p(omotions and in)(easing )ouponing-

Fo( /ea(s, toba))o indust(/ had been embattled 'ith health (elated la'suits- Ma6o(it/ o* these

litigations 'e(e *o( )iga(ette )ompanies in )ompa(ison to smo"eless toba))o indust(/- Still, &ST had

seen pending health (elated la'suits- &ST has histo(i)all/ been one o* the most p(o*itable )ompanies in

)o(po(ate 7me(i)a- 8en though S9 (ated the debt o* man/ toba))o )ompanies as inestment g(ade, its

long te(m outloo" o* the toba))o indust(/ 'as un)lea( gien the (ising (est(i)tions on toba))o p(odu)ts

and health a'a(eness among )onsume(s- ;espite the


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Case # ? Ma((iott Co(po(ation: The Cost o* Capital FIN500


What are the primary business risks associated with UST Inc. Evaluate !rom the viewpoint o! a

credit analyst or potential bond holder "# point$. %int& you may compile a list o! !actors and

comment on them.

&ST has histo(i)all/ been one o* the most p(o*itable )ompanies in )o(po(ate 7me(i)a and a

ma("et leade( in smo"eless toba))o indust(/@ ho'ee( the(e a(e a *e' asso)iated business (is"s 'ith

&ST as listed belo':

• The demand *o( smo"eless toba))o p(odu)ts 'as minimal in inte(national ma("ets and p(odu)t

eApansion outside &S7 *o( g(eate( ma("et segment 'as not mu)h o* an option *o( &ST-

• &ST had been slo' to die(si*/ its p(odu)t line a)(oss a(ious p(i)e points, )onse


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and UST5s e6uity beta is .71+ and UST will maintain a dividend payout ratio e6ual to the 10year

avera)e dividend payout ratio !rom #882 until #88-+ what is the implied earnin)s constant )rowth

rate+ ) "' points$

10year avera)e dividend payout ratio

#$$4 B 5=#$$5 B 5$#$$ B 0#$$+ B +#$$= B 4;iidend pa/out (atio B #-

9(P:

i B * D E. M *

E B -5 * B 5-45 20?/ea( T?bond (ate M * B +

i B 5-45 D -5.+i B #0

9onstant Dividend ;rowth :odel

0180 B .#Dgd1.i?g0180 B )u((ent p(i)e to ea(nings (atio B #H-=d B diidend pa/out B #-i B (e


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Income Statement Pro>ections "in millions+ except per0share data and ratios$

(ctual

#88-

Pro0!orma

#888

Pro0!orma

#888

Pro0!orma

#888

Pro0!orma

#888

Net sales #42H-2 #4$4-H #4$4-H #4$4-H #4$4-H

8IT +5H-H +$-05 +$-05 +$-05 +$-05

Inte(est .2-2 0 +0-5 +=-2 =+-2

(e?taAea(nings

+55-5 +$-05 +25-55 +#+-=5 +0=-=5

TaAes 2=+-0$ H02-5 2+5-+# 2+2-+= 2$-H

Net In)ome 4+-$ 4$H-55 44$-=4 445-0+ 4H$-4$

Net debt 0-0 0-0 >#000-0 >#000-0 >#000-0

Inte(est (ate N7 N7 +-05 +-=2 =-+2

Inte(est)oe(age

N7 N7 ##-2$ #0-#= $-#H

=et Sales #$$= B #42H-2#$$$ B #42H-2 #-05 B #4$4-H

10year avera)e E+0-5.(o Fo(ma B #000 A +-=2 B >+=-2.(o Fo(ma B #000 A =-+2 B >=+-2

Pre0Tax Earnin)s& .(o Fo(ma B 8IT Inte(est B +$-05 ? +0-5 B +25-55.(o Fo(ma B +$-05 +=-2 B +#+-=5

age 4


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.(o Fo(ma B +$-05 =+-2 B +0=-=5

Taxes& .(o Fo(ma (e?TaA 8a(nings A H= TaA ate B +$-05 A -H= B H02-5.(o Fo(ma B +25-55 A -H= B 2+5-+#.(o Fo(ma B +#+-=5 A -H= B 2+2-+=

.(o Fo(ma B +0=-=5 A -H= B 2$-H

=et Income& .(o Fo(ma B (e?TaA 8a(nings TaAes B 4$H-55.(o Fo(ma B +25-55 2+5-+# B 44$-=4.(o Fo(ma B +#+-=5 2+2-+= B 445-0+.(o Fo(ma B +0=-=5 2$-H B 4H$-4$

Interest 9overa)e: Times Inte(est ate 8a(ned .TI8 B 8IT 1 Inte(est 8Apense.(o Fo(ma B +$-05 1 +0-5 B ##-2$.(o Fo(ma B +$-05 1 +=-2 B #0-#=.(o Fo(ma B +$-05 1 =+-2 B $-#H

Gien that *o( ea)h set o* inte(est (ates, (anging *(om +-05, +-=2, and =-+2, ea)h Times Inte(estate 8a(ned is o* these (atios is g(eate( than # .##-2$, #0-#=, and $-#H, (espe)tiel/, &ST 'ill be mo(ethan )apable o* ma"ing the inte(est pa/ments-

2. Should UST Inc. undertake the ?# billion recapitali@ation (ssumin) the entire recapitali@ation

is implemented immediately on #,#,#888. Aill out the !ollowin) !orm and show your solution

process and explain whenever necessary+ assumin) the ?# billion in new debt is constant and

perpetual "' points$. %int& assumes that recapitali@ation plan was not anticipated by the capital

markets+ so the stock price under recapitali@ation plan should be e6ual to the ori)inal market

price plus the PB tax shields per share+ and assume shares are repurchased at the stock price

re!lectin) the recapitali@ation.

Baluation Impact o! recapitali@ation "in millions+ except per0share data and ratios$

Status Cuo "#',*#,#88-$ ?# billion ecap Plan

TaA Shields 0 H=

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Ma("et alue o* &ST >4+0-= >4-

Net ;ebt 0 >#,000-0

Sto)" p(i)e >H4-== >42-H=

Sha(es (epu()hased N7 4H4HH0

Sha(es outstanding #=5,5#,055 #5=4+HH0

Ma("et alue o* 84+0-= >4-

;ebt18


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.( (2*6:(1* x '*3) ) x ,&-

. 12'!&3!

Sto$k %ri$e after $a%. *41'!&2!,,

. 3*,&

Shares re%ur$hased (%er exhibit ,) . 1'1*4,*&& (sto$k %ri$e)

. !,!,,

Shares outstanding after re$a% . original shares outstanding : 01billion 4 ,*&&

. 1'!&2!,,

Market value of equit# before $a% . sto$k %ri$e x outstanding shares

2*&"illion . ,*&& x outstanding shares

Therefore

;utstanding shares . 2*&"illion 4 ,*&&

. 1&'!'1!''


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