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Ust Inc.

In: Business and Management

Submitted By lewwww
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UST Inc. is a principal producer of moist smokeless tobacco products, controlling roughly 77% of the overall market, and widely known for its conservative debt policy and high dividend payout. UST also has an exceptional financial performance as net sales has been growing at 11% compounded annual growth rate, and cash flows have been growing at 12% compounded annual growth rate for the past 10 years. However, UST’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program in December 1998. Although this debt policy benefited UST in term of additional tax shield and rise in stock market price, however, the debt would directly increase financial distress and weaken UST’s cash flow.
This report is prepared to consider debt policy for assessing a leverage recapitalization for UST and evaluate effect of dividend payment from buyback policy. After carefully evaluation of available information and using finance literature and relevant course lectures to conduct financial methodologies, including Unlevered beta, Value of levered firm with Financial Distress, Weighted Average Cost of Capital Analysis for Capital Structure Choice, and Proforma, I recommend UST to implement its one billion dollars buyback program in a period of five years.
Over the years, UST has been named the most profitable company in America in 1998 by Dreman Asset Management as measured by return on equity, return on assets and gross profit margin. Moreover, it has a high dividend payout policy to shareholders while remaining a very cash generative business. Although UST has been a very dominant market position, the market share of UST has been slowly decreasing over the past 7-years.

Exhibit A

UST had a competitive performance in the market. As seen in Exhibit B, UST’s gross profit margin was 2.9x...

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