Problem:
Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here.
1) Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures?
2) Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?
3) Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?
FUNDS FROM
RATING FIXED CHARGE OPERATIONS/ LONG-TERM DEBT/
CATEGORY COVERAGE TOTAL DEBT CAPITALIZATION
Aa 4.00-5.25x 60-80% 17-23%
A 3.00-4.30 45-65 22-32
Baa 1.95-3.40 35-55 30-41