This website uses cookies to ensure you have the best experience. Learn more

Corporate Finance Essay

1635 words - 7 pages

Debt Policy at UST Inc.

Executive Summary

In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand ...view middle of the document...

? Evaluate from the viewpoint of a credit analyst or potential bond holder (1 point). Hint: you may compile a list of factors and comment on them.?
UST has historically been one of the most profitable companies in corporate America and a market leader in smokeless tobacco industry; however there are a few associated business risks with UST as listed below:
• The demand for smokeless tobacco products was minimal in international markets and product expansion outside USA for greater market segment was not much of an option for UST.
• UST had been slow to diversify its product line across various price points, consequently allowing smaller competitors to gain traction for the lower priced smokeless tobacco product categories. Companies like Swedish Match, Conwood and Swisher were reporting rising revenues with snuff and chewing tobacco products.
• Tobacco industries (smoke or smokeless tobacco products) were involved in numerous health related lawsuits and litigations. With FDA regulations, there were increasing restrictions on tobacco use. Consumers were also getting health conscious and understanding the carcinogen effects of tobacco with increasing anti-tobacco campaigns. UST had seven pending health related lawsuits at the end of 1998. Lawmakers were expected to continue to push for new laws to combat youth tobacco use, restrict tobacco advertising and empower FDA to regulate nicotine as a drug. These developments made the distant future of tobacco industry and UST unclear.
2. According to Exhibit 3 of the case, the current P/E ratio is 13.8 (i.e., P0/E0 = 13.8). Using the 20-year T-bond rate of 5.45% from Exhibit 8 of the case, assuming the stock market premium is 7%, and UST’s equity beta is 0.65, and UST will maintain a dividend payout ratio equal to the 5-year average dividend payout ratio from 1994 until 1998, what is the implied earnings constant growth rate, g (2 points)?
5-year average dividend payout ratio
1994 = 58%
1995 = 59%
1996 = 60%
1997 = 67%
1998 = 64%
Dividend payout ratio = 61.6%

CAPM
i = Rf + β(RM – Rf)
β = .65
Rf = 5.45% 20-year T-bond rate
RM – Rf = 7%
i = 5.45% + .65(7%)
i = 10%

Constant Dividend Growth Model
P0/E0 = (1+g)*d/(i-g)
P0/E0 = current price to earnings ratio = 13.8
d = dividend payout = 61.6%
i = required rate of return on the stock = 10%
g = constant growth rate
P0/E0 = (1+g)*d/(i-g)
13.8 = (1+g)*.616/(.1-g)
22.4026 = (1+g)/ (.1-g)
23.4026g = 1.24026
g = 5.3%
3. Assume a 38% tax rate, and net sales will grow at 5% from 1998 level, and the ratio of EBIT to Net sales in 1999 will be equal to the 5-year average EBIT/Net sales ratio from 1994 to 1998 period, prepare a pro-forma income statement as the following table. Will UST will be able to make interest payments (4 points)?

Income Statement Projections (in millions, except per-share data and ratios)
| |Actual |Pro-forma ...

Other Papers Like Corporate Finance

Ethics Essay

518 words - 3 pages compliance with the ethical policies and guidelines that includes finance service, integrity, results, and assisting other individuals be successful through their efforts. Ethical and compliance practices are maintained through Microsoft’s Overview that includes the Finance Code of Professional Conduct, Shareholder Accountability, Corporate Policies and Guidelines, and Board of Directors. Microsoft’s Chief Executive Officer (CEO), Chief Financial

Prospects And Challenge Of Nepalese Debt Market

2827 words - 12 pages , november 1). Bond market Development in Emerging Market: Prospects and Challanges forPakistan. SBP Research Bulletin,, 3. Reisel, N. ((2014) ). On the value of restrictive covenants: Empirical investigation. Journal of Corporate Finance, 27 . doi:251–268 Robert C. Nash, J. M. (2009). Determinants of contractual relations between. Journal of Corporate Finance 9, 201 – 232. Pandey, I.M (1979) Financial Management New Delhi: Vikash Publishing House

Finance Cas Study

658 words - 3 pages = 547,500,000/15,000,000 = $36.47 per share 5. Which method of financing maximizes the per-share stock price of Stephenson’s equity? Debt financing maximizes the price per share of Stephenson’s equity as the price per share on debt financing is $36.50 and the price per share on stock if they use equity to finance is $33.83. Reference: Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. (2011). Corporate Finance: Core Principles and Applications, 3rd ed. New York: McGraw-Hill/Irwin.

Tata Capital

2376 words - 10 pages offer a comprehensive suite of products and services to retail, corporate and institutional customers. * Unique common sales and service structure , a ‘one stop shop’ for the customer, servicing all financial requirements through a ‘single window’ B2B Offerings B2C Offerings Commercial Finance Consumer finance Infrastructure Finance Home Loans Leasing Solutions Loan Against Property CleanTech Finance Wealth Management

Diploma Finance Hots Self-Evaluation Report

572 words - 3 pages Diploma Finance HOTS Self-Evaluation Report For: Mr Coy Module: Hospitality Finance 2 Student Name: Nick Le HOTS Team Name: N2A Date: 14th, May, 2012 Abstract. The assignment is self-evaluation report which assesses and analyse individual performance after running HOTs program. Besides that, this report also show the discuss about personal strengths and weaknesses and given the recommendations on how to improve

Price Waterhouse

257 words - 2 pages Global 500.[30] PricewaterhouseCoopers is organised into the following three main service lines:[31] • Assurance Services • Tax Advisory, (international tax planning and compliance with local tax laws, customs, human resource consulting, legal services and transfer pricing) • Advisory – mainly consulting activities which covers Strategy, Performance Improvement, Transactions Services, Business Recovery Services, Corporate Finance, Business

Example Of Business Ethics Case Study (Indonesian)

926 words - 4 pages , Venture Capital/Private Equity, atau Corporate Finance (www.hbsfinanceclub.com). Melalui acara seperti Konferensi Keuangan Tahunan dan the Days on Wall Street Trek, para anggota komunitas HBS dan profesional dari Wall Street dapat bertemu dan memiliki kesempatan untuk berinteraksi, seperti bertemu dengan tokoh masyarakat, Senator William Proxmire, dan eksekutif bisnis, Bruce Wasserstein. Setiap musim semi, klub tersebut mengadakan pemilihan pejabat

515fin Homework Wk1

921 words - 4 pages would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre. a. Why is corporate finance important to all managers? Corporate

The Four

288 words - 2 pages The Four Basic Areas: Corporate Finance, Investments, Financial institutions, International Finance. Agency problem- inherent conflicts of interest Formals Assets=Liabilities + Shareholders’ Equity, Income =Revenues – Expenses, Current Ratio=Current Assets/Current Liabilities, Quick ratio or acid-test ratio= (Current Assets – Inventory)/ Current Liabilities Cash Ratio= Cash/ Current Liabilities Total debt= (Total Assets- Total Equity

Case Study

1088 words - 5 pages and Theory, 23(2), 13-35. Brown, P., Beekes, W., Verhoeven, P., 2011. Corporate governance, accounting and finance. Accounting and Finance, 51(1), 96-172. Cohen, D., Dey, A., Lys, T., 2008. Real and accrual-based earnings management in the pre- and post- Sarbanes-Oxley period. The Accounting Review, 83(3), 757-787. Ebrahim, A., 2007. Earnings management and board activity: Additional evidence. Review of Accounting and Finance, 6(1), 42-58

Howssdat

495 words - 2 pages L. Ratio and Financial Analysis V. Corporate Finance A. Corporate Governance B. Capital Investment Decisions C. Business and Financial Risk D. Capital Structure Decisions E. Working Capital Management F. Dividend Policy G. Mergers and Acquisitions and Corporate Restructuring VI. Equity Investments A. Types of Equity Securities and Their Characteristics B. Equity Markets: Characteristics, Institutions, and Benchmarks C. Fundamental

Related Essays

Corporate Finance Essay

2010 words - 9 pages 1074 words excluding tables) Reference Ross, Westerfield, and Jaffe (RWJ), Corporate Finance, 9th edition, Irwin McGraw-Hill. Brealey, R.A., S.C. Myers, and F. Allen, Principles of Corporate Finance, McGraw-Hill/Irwin, 11th Global Edition. Royston Wild (2013). A Closer Look at HSBC Holdings' Dividend Potential. In The Motley Fool. Retrieved November 15, 2013 from: http://www.fool.com/investing/general/2013/05/28/a-closer-look-at-hsbc

Corporate Finance Essay

1099 words - 5 pages CORPORATE FINANCE INTRODUCTION Consolidation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In other words, it also can be defined as the combining of assets, liabilities and other financial items of two or more entities into one. This article is taken from business news from The Starbiz entitled “Stronger entity from Kencana

Corporate Finance Essay

8553 words - 35 pages the use of debt to finance the activities of a business. Financial risk is the additional risk put on the shareholder when management decides to finance with debt. The more debt a firm takes on, the more concentrated the business risk on the shareholder because the shareholder is a residual claimant. This results in a higher expected rate of return on the investment by the shareholder. Consequences of an increase in leverage (Leverage

Notes Essay

1808 words - 8 pages definition of factoring LO – Know the typical corporate structure of finance companies. ● Sales finance institutions (e.g., Ford Motor Credit and Sears Roebuck Acceptance Corp.) specialize in making loans to customers of a particular retailer or manufacturer. ● Personal credit institutions (e.g., HSBC Finance and AIG American General) specialize in making installment and other loans to consumers. ● Business credit institutions (e.g., C1T Group and