Advance Managerial Finance - Paper

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Advance Managerial Finance Case 6: Deluxe Corporation 1. What are the risks associated with Deluxe’s business and strategy? Is Deluxe’s current debt level appropriate? Deluxe Corporation was once the largest printer of paper checks in the United States. However, around the past years it started to face difficulties primarily on its sale and earnings growth primarily because of alternative payments systems as online payments, credit and debit cards, etc. Some of the risk Deluxe Corporation is facing are: * Online payment methods that improve along with the Internet, which is almost accessible to everyone, everywhere. The popularity of paper check payments has decline versus this online services. To add to this, the increase…show more content…
Shareholder wealth will be maximized by repurchasing shares from cash and issuances of commercial paper, and debt will be refinanced with similar debt (p.493.) 3. Using the financial ratios in Exhibit 6, how much debt could Deluxe borrow at each 
rating level? According to this case, Singh wants to preserve an investment-grade on Deluxe’s rating. On Exhibit 6 we were provided with financial ratios and their association with the different investment-grade rating categories. These financial ratios can be used to compare the company debt flexibility. In the case it is specified that the manager in Deluxe pays close attention to the earnings before interest and taxes (EBIT) ratio to interest expenses, which is considered the EBIT-coverage ratio. From exhibit 6, we obtain the EBIT-coverage ratio for each rating categories, EBIT divided by the rating ratios will give us the individual interest expenses. We are going to assume that our EBIT is $359.42 million dollars (average.) We were not provided with an EBIT for the 2001-year but we have the forecasted EBIT for the next five years. With this information we get the interest expenses for all the rating categories: AAA AA A BBB BB B $15.36 $27.02 $57.05 $92.16 $163.37 $359.42 Now, Deluxe Corporation can have an estimate on the maximum debt by dividing the interest expenses by the cost of debt for each
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