Deluxe case analysis:
• For financial planning purposes, would you use the Exhibit 4 financial forecast in the case as currently shown, or if not, mention what type of changes (such as added factors) you would consider making to the projections?
• At the end of the case Singh is reflecting on the important competing goals of value creation, flexibility and bond rating. (1) How could Singh add corporate value by working with the corporate capital structure? (2) How could Singh achieve financial flexibility? (3) Describe how you would estimate Deluxe’s financial flexibility (the amount of accessible funds). (4) What are all of the different reasons why the bond rating is important for Deluxe Corporation?
• (1) Using the EBIT interest coverage ratios, by bond grade, provided in Exhibit 6 of the case, the current market yield on corporate debt by bond grade, provided in Exhibit 9, and using the conservative (worst case) future annual EBIT of $200 million, how much debt could Deluxe borrow if it wanted to maintain a given investment grade bond rating? (Calculate this amount that could be borrowed for each investment grade bond rating from AAA to BBB).
Note: On the foregoing calculations assume that all Deluxe debt is in the form of bonds. Make sure that your above calculations of permitted debt levels also pass the total debt/capital ratio test (see Exhibit 6) for each of these bond ratings (and adjust the permitted debt amount if required by the debt/capital limit.)