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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? (Hint:
how will the risk factors affect the firm’s forecast presented in case Exhibit 4 and
the firm’s future need for funds?)
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 is the implied (or maximum) capitalization
ratio at each rating category? (Complete the worksheet “Analysis of Flexibility”
in the Excel template attached.) How would your results be different if the
“Downside EBIT” is used in your estimation?
4. Using Hudson Bancorp’s estimates of the costs of debt and equity in case Exhibit
8, determine the company’s weighted average cost of capital (WACC) in
worksheet “WACC” in the attached Excel template. Which rating category has
the lowest overall cost of funds?
5. Read the introduction of the FRICTO framework in case book pp.456-457 (i.e.,
Part VI of Case 32. Structuring Corporate Financial Policy). Based on the
FRICTO (flexibility, risk, income, control, timing and other) framework and your
analysis above, what should Singh recommend regarding:
•
The target bond rating
•
The company’s current debt level and level of flexibility
•
The mix of debt and equity
•
Any other issues you believe should be brought to the attention of the CEO
and the board
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Case 35 - Case 35 Deluxe
Source of data: Company reports.
By year-end 2001, the market had responded favorably to the spinoff and restruc-
turing efforts—the firm's share price had grown by more than 65% over the year,
outperforming the S&P 500 Index, which had fallen nearly 20%. Over the preced-
ing decade, however, the firm's share price growth had lagged the broad market
indexes. Exhibit 1 gives a 10-year summary of the financial characteristics of the
firm, including share prices and data on comparable market performance. From 1998
to 2001, Deluxe Corporation's compound annual rate of sales growth was -4.0%,
which reflected the growing maturity of the market for paper checks in the United
States. Consistent with the rceived maturity of the market segment, Deluxe's
2001 price earnings ratio (P/E) of 11.0X hovered well below the broader market's
P/E of 29.5%.
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