Debt Policy at UST Inc Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Debt Policy at UST Inc Help

It could be seen in the appendix 1 that the income is representing a decreasing trend because of the recapitalization impact. Without capitalization, the UST’s value would be $474, while with the capitalization of $1 billion; it value would be $425. And if, the value of capitalization increases then UST’s value would decrease. Thus, it is concluded that the company should perform recapitalization with a minimum amount in order to resolve its current issues. In addition to this, the interest coverage ratio would be higher if a minimum amount is borrowed. Furthermore, as the debt increases; the debt to equity ratio would alsoincrease with the same margin. (V Kumar and D Shah, 2009)

Future Dividend Payments

It could be seen in the appendix 2 that the dividend payout ratiois representing a decreasing trend because of the recapitalization impact. Because of low earnings, the dividend payments would also get impacted with the same margin. Furthermore, as the debt increases; the debt to equity ratio would also increase with the same margin. The Smokeless Tobacco Master Settlement Agreement was signed by the company in November 1998,in an attempt to restart its stock repurchase program and resolve its liability issues.(V Kumar and D Shah, 2009).

The analysis is performed in such a way that it compares the EPS’ price to earning ration and the market equity of the company at different debt levels, for the year 1999. The analysis shows the tax shield calculations and outstanding shares, along with therepresentationof the company’s total capital. The tax shield of the UST would be $0; while, with the capitalization of $1 billion, its value would be $132.02, and it value would be $108.01 with the capitalization of $1.5 billion.(See appendix 2). In addition to this, since 1912, the company is paying uninterrupted dividends, so recapitalization would help the company to pay its dividends with the same margin because of the stock repurchase, which would be of much help to manage the remaining stock’s dividend payments in an effective manner.

Recommendations

After evaluating the entire information with the help of stated facts and figures; it is recommended that the company should perform recapitalization but with a minimum amount in order to solve the issues that it is currently being faced with. Without capitalization, UST’s value would be $474; whereas, with the capitalization of $1 billion;its value would be $425. The tax shield of the UST would be $0;whereas, with the capitalization of $1 billion its value would be $132.02.With the capitalization of 1.5 billion USD; its value would be $108.01 Thus, the company recommended with recapitalization, which would not just yield an increased revenuesbut would also help the organization in meeting the requirements of its daily operations. In addition to this, since 1912; the company has been paying uninterrupted dividends, so recapitalization would help it in paying its dividends with the same margin because of the stock repurchase. Thus, the remaining stock’s dividend payments could be managed effectively.

Conclusion

To conclude, the company ismassivelyknown for its high dividend payout and traditional debt policy in the market,since 1912. In July 1993, tobacco smoke got classified as the human carcinogen. The board of directors at UST Inc. decided to acquire a $1 billion loan for the time period of five years, in order to start its stock repurchase program. The loan will paid back with interest, in December 1998.It is recommended that the company should perform recapitalization but with a minimum amount, in order to cope up with its current issues. Without capitalization, UST’s value would be $474. Whereas, with the capitalization of $1 billion;its value would be $425.......................................

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