Deluxe Corporation Case

773 Words4 Pages
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By: Michael Malone

Statement of the Problem Rajat Singh, a managing director at Hudson Bancorp, needs to find a way to rejuvenate the paper check corporation. One main part that needs to be calculated is the appropriate mixture of debt and equity for the firm. The company needs to determine the correct mixture so that they can both minimize the cost of capital and increase the shareholders value. I will analyze the current and future situation of the company, trying to find the correct credit rating to use that will increase income. With the new credit rating, I will be able to recommend a certain amount of debt for the company to take on and be profitable.
Facts and Assumptions When trying to accurately calculate the cost
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Analysis Using CAPM to provide the calculation for the equity, this presents both positive and negative effects.
Advantages
1. Calculates the amount of compensation the investor demands for taking additional risk 2. Compares the returns of the asset to the market over a period of time (Beta)
Disadvantages
1. Based on historical data onto the future (Beta is an estimate) 2. Simplifies assumptions about the market and how investors will actually behave.
Taking the CAPM equation, we were able to figure out eh cost of equity and in its credit range CAPM = Rf + (Rm-Rf) β
=3.45%+(11.03%3.45%)*0.85
CAPM= 9.89%

With this, we can then find each of the costs for equity by averaging them within each of the bond rating categories. This showed a very flat performance in cost of equity. I we compare that to the market beta, our answer for CAPM would change from the 9.89% to the 11.03%. According to exhibit 8 in the case, a cost of equity of 11.03% is between a BBB and BB bond rating. Therefore, if they were to repurchase stock from investors, there share prices would in theory go up because they are investing more and more money into the company. With the three debt instruments in the case, hundreds of millions of dollars would become readily available to the company and be at their disposal. Each of the financing opportunities provides their own money in different forms. Great companies need these different financing ideas to
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