3. What should Singh recommend regarding:
* Target bond rating
* Level of flexibility
* Mix of debt and equity
* Other Issue
As for what should Rajat Singh recommend regarding target bond rating, level of flexibility or reserves, mix of debt and equity and lastly any other issues. So, firstly look into the target bond rating, in our opinion DC needs to position itself to obtain a AAA rating. At AAA grade bond rating shows that AAA bond rating is higher in unused debt capacity so at AAA bonds rating Deluxe company has a lower unused debt capacity. So, that means if the shareholders start to sell, this company may not rebound since it is in a dying industry. The company will be an acquisition target by growing electronic payment companies because of the drops out of the premium ratings.
For your information, for the level of flexibility is the amount of debt DC can take on before you lose the investment-grade bond rating. Based on the financial analysis, the B level is where the cost jumps the most. There is a 26% increase in costs from a level BBB rating to a level BB.
As for mix of debt and equity, DC is targeting an aggressive share buyback plan. They are increasing their equity in the company by reducing shares. But because of the future of the company, they will also need to take on debt. Based on the financial analysis, they are better off taking on debt. Debt is cheaper for DC. Cost of debt ranges between 5.47% to 12%, and that does not even include the 38% tax shield. Cost of equity is more expensive, it ranges from 10.25% to 14.25%, and there is no tax shield. Cost of debt after the tax change ranges between 3.39% to 7.44%.
Lastly, for other issue knows today is 12 years after the case, and DC is still in business.
As we know, prior to the 1990s, the Deluxe Corporation (DC), the world’s largest printer of checks as well as a provider of electronic products and services to financial institutions and...
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