Financial Industry

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Debt Policy at UST Case Questions Group members: Wei-Ting Liao; Cong Ren; Gerald Nyiti; Beidan Wang 1- ) Give a brief summary of the company background UST Inc. is a smokeless tobacco company which enjoyed a long tradition and a recognizable brand name. It is the leading producer of moist smokeless tobacco products and widely known for its conservative debt policy and uninterrupted cash dividend payout since 1912. The company is the major player in U.S. smokeless tobacco market. For example, it holds the maximum market share (77%) as a whole, and dominates especially in the growing segment of moist smokeless tobacco. Additionally, it has widely recognized brand and competitive positon in the market by constant innovation and new…show more content…
So, UST does not have advantage in geographical diversification as most cigarettes companies do.  Asset Tangibility We can see from the following table, UST invested in non-core operation more and more. The total asset is increasing stably over the year from 1988 to 1998. Litigation threat: probable liability obligations UST had seven pending health related lawsuits at the end of 1998. The outcomes of these suits are uncertain. Despite the major Medicaid state settlements, lawmakers are expected to continue to push for new laws to combat youth tobacco use. Other litigation against tobacco companies is expected to continue, especially suits filed by individuals. This uncertain litigation and legislative environment makes the future cash outflows of UST risky. The previous uncertainty is enhanced by a lawsuit that alleged that UST had violated antitrust and advertising laws and participated in anti-competitive conduct. Should UST lost the suite, it will be more vulnerable with competitors. 3-According to MM (if no taxes), does debt issuance matter? How about in the presence of taxes what are the pros and cons of debt? The first preposition of Miler Modiglian principle states that; in an environment where there are no taxes exist, default risk or agency costs and capital structure are irrelevant. The value of a firm is independent of its debt ratio and the cost of capital will remain unchanged as the leverage changes. Thus, Debt issuance will not
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