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What should Singh recommend regarding: * Target bond rating * Level of flexibility * Mix of debt and equity * Other Issue As for what should Rajat Singh recommend regarding target bond rating, level of flexibility or reserves, mix of debt and equity and lastly any other issues. So, firstly look into the target bond rating, in our opinion DC needs to position itself to obtain a AAA rating. At AAA grade bond rating shows that AAA bond rating is higher in unused debt capacity so at AAA bonds rating Deluxe company has a lower unused debt capacity.
So, that means if the shareholders start to sell, this company may not rebound since it is in a dying industry. The company will be an acquisition target by growing electronic payment companies because of the drops out of the premium ratings. For your information, for the level of flexibility is the amount of debt DC can take on before you lose the investment-grade bond rating. Based on the financial analysis, the B level is where the cost jumps the most.
There is a 26% increase in costs from a level BBB rating to a level BB.
As for mix of debt and equity, DC is targeting an aggressive share buyback plan. They are increasing their equity in the company by reducing shares. But because of the future of the company, they will also need to take on debt. Based on the financial analysis, they are better off taking on debt. Debt is cheaper for DC. Cost of debt ranges between 5.
47% to 12%, and that does not even include the 38% tax shield. Cost of equity is more expensive, it ranges from 10. 25% to 14. 25%, and there is no tax shield. Cost of debt after the tax change ranges between 3. 39% to 7. 44%.
Lastly, for other issue knows today is 12 years after the case, and DC is still in business. CONCLUSION As we know, prior to the 1990s, the Deluxe Corporation (DC), the world’s largest printer of checks as well as a provider of electronic products and services to financial institutions and retail companies, was characterized as a generally stable, family oriented business. This relatively calm situation was unsettled in the 1980s by deregulation of the banking industry and changes in technology. Deluxe is forced to adopt a business model and implement strategic objectives to stay alive.
Therefore, based on the all the calculation and explanations, we have finally fulfilled all the statement of problems. As for the foreseen financial requirement for the coming years, which back then was the year after 2001, it shows that DC needs additional financing for working capital, capital asset purchases, possible corporate acquisitions, repayment of short-term debt, interest payments on long-term debt, dividend payments to shareholders and possible stock buybacks depending on the state of the stock they own.
Moving on as for the financial flexibility of Deluxe Corporation, it can be concluded that the debt level of DC seems to be not appropriate which is only 5. 71% from the total capital. As what it stated in Ehibit 8, DC could borrow more debt since it cost of debt (Kd) is lower than its cost of equity (Ke). Besides, the minimum WACC is obtained at bond rating AAA (9. 86%) and the same goes the optimum debt level for Deluxe would borrow which is USD 807. 50M again at bond rating AAA.
From there, by maintaining bond rating AAA, it can be seen that the minimum interest or total cost that DC need to bear is only USD 83. 81M. In a nutshell, again, it shows that DC can generate its fund in its lowest cost if it maintains AAA bond rating because through that type of bond rating, DC can generate funds by paying minimum cost of capital, quickly reach the breakeven point and can easily gain profit after that. However, this company has to diversify its business in order to stay around in this business world.
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