Case study: Debt Policy at UST Inc.

c. Did anything surprise you about the company's values? Why or why not? (1-3 sentences. 1.0 points)

UST dividend payment ability can be hampered given the following risk factors: anti-trust dispute is resolved in favor of competitors and UST is subject to further penalty, corporate restructuring or new entrants are encouraged to enter the moist smokeless market; management’s continued lackluster non-core investment performance further harms the company’s return over investment; Price value further prey market share of premium products while premium R&D is not catching up with the pace.

16. How would you assess the overall risk structure of the company in terms of its Operating Risks and Financial Risk (Debt to Capitalization Ratio)? Very strong Net Worth and DTNW, and low debt to total

Based on the financial ratios calculated, it appears that Pinnacle Manufacturing (the “Company”) is both using up cash assets and increasing its debt. The Cash Ratio has declined each of the past three years indicating that the Company has a decreasing ability to pay its current liabilities from cash and will be required to liquidate assets to pay off current liabilities. The Current Ratio has also declined each of the last three years. In 2009, it was 218.6% or 2.186. This means that for every dollar of current liabilities the Company had $2.18 in current assets with which to pay those liabilities.

New Tobacco Atlas Estimates U.S. $35 Billion Tobacco Industry Profits and Almost 6 Million Annual Deaths. (2012) Retrieved August 2, 2015, from

1. How would you characterize the business risk of Bed Bath & Beyond? Review their financial performance.

1. How would you characterize the business risk of Bed Bath & Beyond? Review their financial performance.

This case discusses Philip Morris Inc. intentions to acquire the Seven-up Company in an effort to diversify their consumer goods. The decision has already been made, however they must decide on an offer price to buy out the company. This report will discuss PM’s acquisition strategy and its appropriateness, along with whether or not 7up fits the criteria of PM’s strategy. The report will further discuss the methods used to determine the maximum amount that Philip Morris should pay for 7up, while also going into detail about the minimum price 7up should accept as a buyout.

Review of Financial Research Report: This assignment is an analysis of a US publicly-traded company; its common stock could be a prospective investment.  The report is due in Week 10, in needs to be at least 5 pages, and it needs to cover the following topics:

d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.

1. How much business risk does American Home Products face? How much financial risk would American Home Products face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value, if any can American Home Products create for its shareholders at each of the proposed levels of debt? (See Exhibits 1 and 2 )

As the leading manufacturer in the moist smokeless tobacco industry, UST Inc. has long been recognized by its ability to generate high profit using low financial leverage. With a dominant market share of 77%, the company maintains a pricing power that allows it to institute annual price increases without losing costumers. However, UST’s market share was eroded significantly in recent years by price-value competitors who enter the market with lower prices. Although UST responded to these threat by introducing new products, market share still decreased by 1.6% over past 7 years. In addition, UST is also exposed to an unfavorable legislative environment, in which the company is under advertising and product promotion

I have chosen cigarettes to be my market transaction as it is has a very large and wide market. A cigarette is a product consumed through smoking and manufactured out of cured and finely cut tobacco leaves and reconstituted tobacco, often combined with other additives1,

3. What are the biggest risks faced by the firm in the next 5-10 years?

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.