Deluxe case analysis
• For financial planning purposes, would you use the Exhibit 4 financial forecast in the case as currently shown, or if not, mention what type of changes (such as added factors) you would consider making to the projections?
• At the end of the case Singh is reflecting on the important competing goals of value creation, flexibility and bond rating. (1) How could Singh add corporate value by working with the corporate capital structure? (2) How could Singh achieve financial flexibility? (3) Describe how you would estimate Deluxe’s financial flexibility (the amount of accessible funds). (4) What are all of the different reasons why the bond rating is important for Deluxe Corporation?
• (1) Using the EBIT interest coverage ratios, by bond grade, provided in Exhibit 6 of the case, the current market yield on corporate debt by bond grade, provided in Exhibit 9, and using the conservative (worst case) future annual EBIT of $200 million, how much debt could Deluxe borrow if it wanted to maintain a given investment grade bond rating? (Calculate this amount that could be borrowed for each investment grade bond rating from AAA to BBB). Note: on the foregoing calculations assume that all Deluxe debt is in the form of bonds. Make sure that your above calculations of permitted debt levels also pass the total debt/capital ratio test (see Exhibit 6) for each of these bond ratings (and adjust the permitted debt amount if required by the debt/capital limit.) Remember that you can use the Deluxe case analysis format (sheet 1) posted on Blackboard learn. (2) What factors could cause your calculated maximum debt amounts for Deluxe per bond grade to change in the future?
• Using the case Exhibit 8 capital costs by bond rating category for debt and equity, and using the Exhibit 6 total debt/capital percentages under different bond ratings for establishing your WACC debt and equity weights, determine which debt rating category provides the lowest WACC. You can use the Deluxe case analysis format (sheet 2) posted on Blackboard learn.
• Considering the above questions and your answers, and what you learned from the case and the lecture, what should Singh recommend regarding the target bond rating and mix of debt and equity for Deluxe and explain why?
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