Case Study on Ust

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1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of credit analyst or bond holder. UST Inc. is a smokeless tobacco company with a long tradition and a recognizable brand name. A strong brand name can have lots of associations with high quality, revenues, soundness, growth, etc. But, this is one of the characteristics that can be like two edged sward. On one side, company with long tradition is expected to to operate in a stable and prosperous way as it always did, but on the other side, company itself can get too self confident and fail to see the newcomers and other threats. UST has ignored newcomers, and now they all have a growing market shares,…show more content…
Should UST, Inc., alter the new debt via a different level or a change in the amount of debt through time? In order to answer the question, I calculated if financing through debt was the right choice. I used EBIT-EPS analysis. Two choices were analyzed: debt or equity financing. I thought that 5% would be cost of debt, taking into account the company 's high S&P credit rating (AAA investment grade). EPS = earnings per share, EBIT = earnings before interest and taxes, I = interest expense, T = tax rate P = preferred stocks, S = number of common shares outstanding => EBIT=373.511997 *a - $1bil was divided by price of shares in order to get how many shares would have to be sold to raise $1 bil Breakeven point of EBIT is at $373.511997 mil. If EBIT is higher than this number (and it is:$753.3 mil), than debt should be chosen. But for EBIT lower than $373.5 mil equity financing would be wiser choice. Breakeven point of EBIT: stock Debt EBIT 373,511,997 373,511,997 - interest 0 50,000,000 EBT 373,511,997 323,511,997 - tax (38%) 141,934,558 122,934,559 EAT 231,577,439 200,577,438 No.of shares outstanding 214,169,725 185,500,000 EPS 1.08 1.08 For EBIT lower than breakeven point: stock Debt EBIT 200,000,000 200,000,000 - interest 0 50,000,000 EBT 200,000,000 150,000,000 - tax

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