Nuzair
Contents
Introduction 1
Problem Statement 1
Criteria 1
Possible Solutions 2
Present Analysis 2
Preferred Solution 4
Conclusion 5
Deluxe Corporation
Introduction
The case presents Deluxe Corporation and its current need of incorporating long-term debt into its capital structure to finance possible acquisitions, dividend payout and repurchasing the firm’s securities. The company is a major competitor in check printing industry that is characterized by intense price competition, concentration and slow decline in sales owing to wave of technological change. Due to the fall in consumer demand for checks, in lieu of rising online payments, debit and credit card usage etc, the Deluxe Corporation (DC) has pursued intense strategy of divestiture of its noncore businesses, reduction of labor force and rationalization of operations. DC also embarked on a rigorous share repurchase policy by buying back 19% of its shares in 2001. However to sustain its profitability position within the industry for the next 5 years, DC now requires a new round of debt financing.
Problem Statement
The problem statement is as follows:
“What is the appropriate level of debt that can be raised by DC in order
• to provide financial flexibility to the company
• to ensure value creation for the shareholders in terms of dividend payout and share repurchases
• to lower the cost of capital while choosing the right bond rating”
Criteria
The criteria for evaluating the appropriate debt and equity mix is the interest coverage ratio and cost of debt associated with different bond ratings of investment grade bonds. Another criterion is that of value creation for stakeholders in terms of a 52% dividend payout for the projected period from 2002 to 2006.
Possible Solutions
There can be two possible solutions for the problem at hand. One solution involves the finding out of free cash flows to firms that are sufficient to service debt obligations including interest and
Introduction 1
Problem Statement 1
Criteria 1
Possible Solutions 2
Present Analysis 2
Preferred Solution 4
Conclusion 5
Deluxe Corporation
Introduction
The case presents Deluxe Corporation and its current need of incorporating long-term debt into its capital structure to finance possible acquisitions, dividend payout and repurchasing the firm’s securities. The company is a major competitor in check printing industry that is characterized by intense price competition, concentration and slow decline in sales owing to wave of technological change. Due to the fall in consumer demand for checks, in lieu of rising online payments, debit and credit card usage etc, the Deluxe Corporation (DC) has pursued intense strategy of divestiture of its noncore businesses, reduction of labor force and rationalization of operations. DC also embarked on a rigorous share repurchase policy by buying back 19% of its shares in 2001. However to sustain its profitability position within the industry for the next 5 years, DC now requires a new round of debt financing.
Problem Statement
The problem statement is as follows:
“What is the appropriate level of debt that can be raised by DC in order
• to provide financial flexibility to the company
• to ensure value creation for the shareholders in terms of dividend payout and share repurchases
• to lower the cost of capital while choosing the right bond rating”
Criteria
The criteria for evaluating the appropriate debt and equity mix is the interest coverage ratio and cost of debt associated with different bond ratings of investment grade bonds. Another criterion is that of value creation for stakeholders in terms of a 52% dividend payout for the projected period from 2002 to 2006.
Possible Solutions
There can be two possible solutions for the problem at hand. One solution involves the finding out of free cash flows to firms that are sufficient to service debt obligations including interest and