Debt Policy at Ust Inc.

Question 1

Business risk is a variation in operating profits. The level of risk will be affected by 5 factors as followed.

First is the sensitivity of the firm’s sales to the economic condition. Demand for moist smokeless tobacco products do not varied with the economic condition, which is supported by the annual growth rate 3.7% over the 17 years. No matter how the U.S. economic situation is, UST’s sales are increasing. The lesser degree of sensitivity can identify the lower level of business risk for UST Inc.

Second is the degree of competition. Due to the very high entry barriers of tobacco industry, the numbers of competitors are limited. UST Inc., is the market leader who gains the large market shares together with the brand recognition, it faces the lesser degree of business risk compared to its competitors. However, its shares may be eroded significantly by the cutting prices strategy of small players, which is risky to the firm’s operating profits. Therefore, the primary business risk associated with UST Inc., comes from price-cutting of competitors.

Third is the degree of product diversification. UST Inc., has total 6 brands of products to satisfy all types of customers’ demand for smokeless tobacco products. The more variety of products can identify the lower degree of business risk due to diversification.

Fourth is the future growth prospect. As the USDA reported that moist smokeless tobacco has be the fastest growing segment of tobacco industry, and it is prospected to grow over the long-run due to the more relax litigation and legislative issues on smokeless tobacco during recent years. UST Inc., have the low rate of sale growth, it might be caused by UST Inc., is in the matured stage of product cycle which can maintain the sale volume. Therefore, in term of the future growth prospect, UTC Inc., still face the low level of business risk.

Fifth is the size of firm. UST Inc., is a market leader and large firm in the industry. The larger...