Case study: Debt Policy at UST Inc.
FIN 5204
MANAGING CORPORATE CAPITAL INVESTMENT AND CAPITAL STRUCTURE
FALL 2007
DEBT POLICY AT UST INC.
1. WHAT ARE THE PRIMARY BUSINESS RISKS ASSOCIATED WITH UST INC.? WHAT ARE THE ATTRIBUTES OF UST INC.? EVALUATE FROM THE VIEWPOINT OF THE BONDHOLDER.
Over the years, UST has been a dominant producer in the tobacco industry, specifically the moist tobacco industry. Even though the past strategy with UST has entailed raising the prices of its products on a regular basis, the company still shows signs of positive growth. Additionally, there have been recent issues with smokeless tobacco products, such as lawsuits. However, there remains a constant consumer demand for UST products. When evaluating the business risk of a company, one of the primary drivers of its business risk stems from the price elasticity of its products. Thus, these are a few reasons that illustrate that the smokeless tobacco industry (UST's most dominant EBIT contributor) has a relatively steep demand curve and should be considered as having an inelastic consumer demand. Also, it is important to note that UST has products outside of its core operations in the wine and premium cigar market. Also, UST has introduced products in the price value market as consumer demand has 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 -_ poor
Obviously, the two most troubling business risks associated with UST are its litigation and product diversification risks. The smokeless tobacco industry will always face potential lawsuits because of the ongoing health concerns. Also, even though UST has diversified into other markets (wine and cigars), these products are very minimally attributing to UST's EBIT. Nevertheless, UST products have a steady demand for their products, they produce positive cash flows
MANAGING CORPORATE CAPITAL INVESTMENT AND CAPITAL STRUCTURE
FALL 2007
DEBT POLICY AT UST INC.
1. WHAT ARE THE PRIMARY BUSINESS RISKS ASSOCIATED WITH UST INC.? WHAT ARE THE ATTRIBUTES OF UST INC.? EVALUATE FROM THE VIEWPOINT OF THE BONDHOLDER.
Over the years, UST has been a dominant producer in the tobacco industry, specifically the moist tobacco industry. Even though the past strategy with UST has entailed raising the prices of its products on a regular basis, the company still shows signs of positive growth. Additionally, there have been recent issues with smokeless tobacco products, such as lawsuits. However, there remains a constant consumer demand for UST products. When evaluating the business risk of a company, one of the primary drivers of its business risk stems from the price elasticity of its products. Thus, these are a few reasons that illustrate that the smokeless tobacco industry (UST's most dominant EBIT contributor) has a relatively steep demand curve and should be considered as having an inelastic consumer demand. Also, it is important to note that UST has products outside of its core operations in the wine and premium cigar market. Also, UST has introduced products in the price value market as consumer demand has 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 -_ poor
Obviously, the two most troubling business risks associated with UST are its litigation and product diversification risks. The smokeless tobacco industry will always face potential lawsuits because of the ongoing health concerns. Also, even though UST has diversified into other markets (wine and cigars), these products are very minimally attributing to UST's EBIT. Nevertheless, UST products have a steady demand for their products, they produce positive cash flows