The Deluxe Corporation case study solution contains two files, and Excel and Word file. The
Excel file has the financial analysis required for the paper in Word.
The solution is based on the following objectives:
1. Survey the determinants of corporate bond ratings, including profitability and coverage
ratios, as well as capitalization ratios as a measure of credit quality.
2. Explore the practical challenges involved in determining the optimal mix of debt and
equity. In particular, the case requires assessment of the trade-offs between the benefits of
the debt tax-shield and the costs of financial distress.
3. Consider the concepts of debt capacity and financial flexibility. (In this case, we
consider “flexibility” as the ability to access capital without falling below the company’s target
bond credit rating.)
The Deluxe Corporation solution answers the following questions:
1. What is the nature of Deluxe Corporation’s (Deluxe) business? Describe the firm’s
strategy and the risks the firm faces as a result of its strategy.
2. What are management’s motivations and key objectives in setting the firm’s financial
3. What financing requirements are foreseen for Deluxe in the coming years?
4. Using the data from Exhibit 6, calculate the amount of debt that Deluxe could borrow
under each debt rating. Calculate the debt-to-equity ratios under each ratings category. (This
would make for a good chart!)
5. Using Hudson Bancorp’s estimates of the costs of debt and equity in Exhibit 8, which
rating has the lowest overall cost of funds?
6. Do you think Deluxe’s current level of debt is appropriate?
7. What recommendations would you make concerning
1. Target bond rating.
2. Level of flexibility.
3. Mix of debt and equity.
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2001 Fiscal Year
Case 35 Deluxe Corporation 1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years? 1) Short term financing needs Working capital, capital asset purchases, possible acquisitions, repayment of outstanding debts, dividend payments and repurchasing the firm’s securities. In February 2001, Deluxe paid off $100 million of its 8.55% long-term unsecured and unsubordinated notes, which is had issued in 1991. 2) Repurchase program: As shown as below, in the end of 2001, the company repurchase 11.3 million shares. Singhalso believe that the board would continue to pursue an aggressive program of share repurchase. 3) Other demands on the firms resources: Cash dividends would be held constant for the foreseeable future. Capital expenditures would be about equal to depreciation for the next few years. 4) Considerations in assessing financial policy In addition to assessing Deluxe’s internal financing requirements, singh recognized that his policy recommendations would play an important role in shaping the perceptions of the firm by bond-rating agencies and investors. 2. What are the main objectives of the financial policy that Rajat Singh must recommend to Deluxe Corporation’s board of directors? Sihgh believed that it was essential that the company’s financial policies afford it