Tn Deluxe
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 34); “Rosario Acero S.A.,” (UVA-F-1211); “Gainesboro Machine Tools Corporation,” (Case 26) 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 firm’s core business. The student must recommend an appropriate financial policy for the firm and, in support of that recommendation, must show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.
This case may be used to pursue a number of teaching objectives:
• Survey the determinants of corporate bond ratings. The case highlights the important influence of the rating agencies on the costs of debt and the access to capital markets. The case data affords students the opportunity to explore profitability, coverage ratios, and capitalization ratios as measures of credit quality.
• Explore the practical challenges involved in determining the optimal mix of debt and equity, in particular assessing the trade-off between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix.
• Consider the concepts of debt capacity and financial flexibility. The notion advanced in this case is that flexibility is the ability to access capital without falling short of the firm’s minimum target credit rating.
Suggested Questions
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 34); “Rosario Acero S.A.,” (UVA-F-1211); “Gainesboro Machine Tools Corporation,” (Case 26) 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 firm’s core business. The student must recommend an appropriate financial policy for the firm and, in support of that recommendation, must show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.
This case may be used to pursue a number of teaching objectives:
• Survey the determinants of corporate bond ratings. The case highlights the important influence of the rating agencies on the costs of debt and the access to capital markets. The case data affords students the opportunity to explore profitability, coverage ratios, and capitalization ratios as measures of credit quality.
• Explore the practical challenges involved in determining the optimal mix of debt and equity, in particular assessing the trade-off between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix.
• Consider the concepts of debt capacity and financial flexibility. The notion advanced in this case is that flexibility is the ability to access capital without falling short of the firm’s minimum target credit rating.
Suggested Questions