Ust Case Solution
Key Issue 2: Is $1b appropriate to enhance UST’s firm value and ultimately shareholder value?
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
Before evaluating whether $1b is value enhancing in quantitative measure, ability to cope with pre-requisite interest payment and potentially dividend payment (possibly dividend growth maintenance) should be considered.
Required debt rate and pro forma income statement
Risk determinants
Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in terms of cash or collateral is not strengthened. UST is characterized positively by commanding market share position in the moist smokeless tobacco market, strong brand name recognition, premium product offering, pricing flexibility; negatively by lack of geographical and product diversification, market share erosion, lackluster non-core investment performance, and recent key executive reshuffle and anti-trust dispute with Conwood Co.. Besides its cash generative nature, smokeless tobacco market still is faced with legal challenges (legislation, litigation, marketing ban), slowing down growth and possibility of future health research negatively influencing customer behavior. Financial measures will be conducted in the form of pro-form income statement, key data and ratios as follows.
Since credit rating determines debt cost and debt cost determines pro-forma income statement which ultimately may affect the initial credit rating assumption, AAA long-term issue rating was initially assumed but
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
Before evaluating whether $1b is value enhancing in quantitative measure, ability to cope with pre-requisite interest payment and potentially dividend payment (possibly dividend growth maintenance) should be considered.
Required debt rate and pro forma income statement
Risk determinants
Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in terms of cash or collateral is not strengthened. UST is characterized positively by commanding market share position in the moist smokeless tobacco market, strong brand name recognition, premium product offering, pricing flexibility; negatively by lack of geographical and product diversification, market share erosion, lackluster non-core investment performance, and recent key executive reshuffle and anti-trust dispute with Conwood Co.. Besides its cash generative nature, smokeless tobacco market still is faced with legal challenges (legislation, litigation, marketing ban), slowing down growth and possibility of future health research negatively influencing customer behavior. Financial measures will be conducted in the form of pro-form income statement, key data and ratios as follows.
Since credit rating determines debt cost and debt cost determines pro-forma income statement which ultimately may affect the initial credit rating assumption, AAA long-term issue rating was initially assumed but