UST Inc. is a dominant player in the smokeless tobacco industry. We have been tasked with weighing the cost and benefits of having leverage in their capital structure and to advise the CEO whether or not to go ahead with the recapitalization. After solving for UST’s credit ratings and value given three different stock buyback scenarios, $700 million, $1 billion, and $1.5 billion, we would suggest that UST move forward with the recap at $1 billion.
While the primary business risks associated with UST include political risks, legal risks, competition, and the recent resignation of key executive officers, some attribute weigh in favor of adding debt to the capital structure. Antitrust and advertising legislature is expected to continue that may decrease future cash flows. Legally, UST faces seven current health related lawsuits and recently signed the Smokeless Tobacco Settlement Agreement with Medicaid that requires a payment of $100 to $200 million over the next 10 years. UST commands the market with 77% market share, yet their market share has been decreasing at a steady 1.6% rate over the last seven years. The resignation of the CEO and CFO of the tobacco unit may decrease future cash flows, as well. At the same time, some factors weigh in favor of adding debt to their capital structure. UST is
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This buyback would occur at a price of $34.88. Before the recap, there are 185.5 million shares outstanding, the market equity divided by the share price. After the recapitalization of $700 million, $1 billion, and $1.5 billion, the share price would be $39.12, $41.27, and $45.41, respectively. Because the number of shares decrease but the market equity remains constant, the share prices increases, and therefore, creates value for the shareholders. The number of shares outstanding in each scenario, will decrease by the amount of debt issued divided by the share price at the time of the buyback,
In the case of Riser v. American Medical Int’l, Inc., Riser, a 69-year-old mother of four children, was suffering from circulation complications in her lower arms and hands. She had a history of several conditions such as diabetes mellitus, end-stage renal failure, and arteriosclerosis. The physician at Hospital A, Dr. Sottiurai, requested bilateral arteriograms to find the etiology of Riser’s circulation problems. However, Hospital A could not fulfill Dr. Sottiurai’s request, so Riser was transferred to Hospital B under the care of Dr. Lang, who was a radiologist. At this instance, Dr. Lang mistakenly performed a femoral arteriogram instead of the bilateral arteriogram that Dr. Sottiurai had originally ordered, and after the procedure when Riser was on her way to be
For this assignment, we learned that Maurice Clarett filed a case against the NFL where he argued that the NFL’s three-year rule acted as an unreasonable restraint in violation of the Sherman Antitrust Act and the Clayton Act. On the other hand, the NFL argued that its three-year rule was covered from the antitrust laws by the nonstatutory labor exemption. First, the case was reviewed by the district court which concluded that the NFL's eligibility rules violated antitrust laws by requiring the player to wait at least three years before entering the NFL draft and that the eligibility criteria was not immune from those antitrust laws. The court favored Clarett making him eligible for the 2004 NFL Draft.
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
As company re-purchases on stocks essentially tells the market that they think that the company’s stock is undervalued. It is expected that this will have a psychological effect on the market. Also, the stock buybacks raise the demand for the stock on the open market.
Based on the information in the case, Pepsi could invest US$360 million in exchange for 30% equity of Deltex. So we have to calculate the value of 30% equity of Deltex. First, we calculated the discount factor by using average unlevered beta of US independent bottlers, US 10 year Treasury bond as risk free rate and assuming market risk premium 10%. We came up with 9.83% of WACC. Next, we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow, we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo.
However, financial situation of the firm plays a very important role in the decision of the bondholder and this company has been one of the most profitable companies America in terms of ROE, ROA ad gross profit margin. Apart from decrease in earnings and cash flow in 1997, UST had continuous increases in sales (10-year compound annual growth rate of 9%), earnings (11%) and cash flow (12%). They are generating their cash flows out of the operations. Thanks to their premium pricing, they are achieving more than average gross profit margin. So, over the years UST's revenues are stable and positive, and generally its statements are positive. The company does not have any problems with its cash flow.
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
Instadebit is a well established Canadian-based payment processing company that facilitates customers having the ability to make payments for goods and services over the Internet. The company's headquarters are located in Toronto. At this point in time, the company's payment services are intended for use by customers living in Canada, though this payment option has started popping up on iGaming sites in countries like Australia. As an online gaming payment option, it should be attractive to online gamblers, who are always looking for a fast and efficient way to send money without a credit card or disclosing personal information to their online casino. It's up to the gambler to verify with their online gaming site as to whether
In assessing Du Pont’s capital structure after the Conoco merger that significantly increased the company’s debt to equity ratio, an analyst must look at all benefits and drawbacks of a high debt ratio. The main reason why Du Pont ended up with a high debt to equity ratio after acquiring Conoco was due to the timing and price at which they bought Conoco. Du Pont ended up buying the firm at its peak, just before coal and oil prices started to fall and at a time when economic recession hurt the chemical industry of Du Pont. The additional response from analysts and Du Pont stockholders also forced Du Pont to think twice about their new expansion. The thought of bringing the debt ratio back to 25% was brought on by the fact that the company saw that high levels of capital spending were vital to the success of the firm and that high debt levels may put them at higher risk for defaulting.
The increase in debt ratio has attracted the attention of rating agencies who have clearly stated that in order for HCA to maintain their A bond rating, HCA must return to their 60-40 capital structure. Now the question arises as to whether the A rating should be sought or should HCA move to a less conservative position. Some investors believe that a more aggressive use of leverage would present greater opportunities in the future. Others feel that with changes in the Medicare/Medicaid reimbursement structure on the horizon, HCA should remain conservative. In order to decrease the debt ratio, HCA would have to 1) decrease the growth rate (inadvertently decreasing ROE) or 2) decrease debt/increase equity.
Smokers all over the United States in recent years have brought class-action suits against the tobacco companies. Plaintiffs argue that the tobacco companies had knowledge of the health risks that could be associated with smoking, but they chose to withhold this information from the public. Since they chose to withhold this information the companies should be responsible for the cost of their health problems. Smokers have been rather successful in this endeavor especially since it has been a scientifically proven fact that smoking causes lung cancer. In Florida alone smokers and their families were awarded 200 billion dollars (Thomas ).
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
Having a low P/E ratio with respect to the rest of the market, and the replacement cost of the firm being greater than its book value (argument 3), there is a good chance that the current stock price and the proposed offering price are too low. Although long-term debt is a better financing choice, a few of the drawbacks are pointed out. Debt holders claim profit before equity. holders, so the chances that profits may be lower than expected. increases risk to equity, may reduce or impede stock value. However, the snares are still a bit snare.
You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.