Deluxe Corporation Teaching Note

4197 Words Dec 8th, 2014 17 Pages
DELUXE Corporation

Teaching Note

Synopsis and Objectives

Suggestions for complementary cases in capital structure choice and financial flexibility: “The Wm. Wrigley, Jr. Company: Capital Structure, Valuation, and Cost of Capital,” (case 30); “Rosario Acero S.A.,” (case 32); “Gainesboro Machine Tools Corporation,” (case 25) In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the
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What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years?

2. What are the main objectives of the financial policy that Rajat Singh must recommend to Deluxe Corporation’s board of directors?

3. Drawing on the financial ratios in case Exhibit 6, how much debt could Deluxe borrow at each rating level? What capitalization ratios would result from the borrowings implied by each rating category?

4. Using Hudson Bancorp’s estimates of the costs of debt and equity in case Exhibit 8, which rating category has the lowest overall cost of funds? Do you agree with Hudson Bancorp’s view that equity investors are indifferent to the increases in financial risk across the investment-grade debt categories?

5. Is Deluxe’s current debt level appropriate? Why or why not?

6. What should Singh recommend regarding:

• the target bond rating

• the level of flexibility or reserves

• the mix of debt and equity

• any other issues you believe should be brought to the attention of the CEO and the board

Supporting Spreadsheet Files

To assist student preparation, the instructor should consider making available to the students the Microsoft Excel spreadsheet file, Case_31.xls, which contains a number of the exhibits and a working forecast model. The spreadsheet file TN_31.xls supports instructor preparation of the

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