Advance Managerial Finance

Case 6: Deluxe Corporation

1. What are the risks associated with Deluxe’s business and strategy? Is Deluxe’s current debt level appropriate?

Deluxe Corporation was once the largest printer of paper checks in the United States. However, around the past years it started to face difficulties primarily on its sale and earnings growth primarily because of alternative payments systems as online payments, credit and debit cards, etc. Some of the risk Deluxe Corporation is facing are:

* Online payment methods that improve along with the Internet, which is almost accessible to everyone, everywhere. The popularity of paper check payments has decline versus this online services. To add to this, the increase …show more content…

Using Hudson Bancorp’s estimates of the cost of debt and equity in Exhibit 8, which rating category has the lowest overall cost of funds? Do you agree with Hudson
Bancorp’s view that equity investors are indifferent to the increases in financial risk across the investment-grade debt categories?

We used the numbers from exhibit eight on page 506 in order to calculate the WACC of each of the ratings. We used an assumed tax rate of 38%, which can be found on page 501, in the column of year 2002, which was the last available tax rate. After using this tax rate, we applied it to the cost of debt pretax of the ratings and got the after tax cost of debt for each rating. The numbers were as follows: for AAA it was 3.39(5.47-[5.47*.38]), for AA it was 3.41(5.50-[5.50*.38]), for A it was 3.53(5.70-[5.70*.38]), for BBB it was 3.91(6.30-[6.30*.38]), for BB it was 5.58(9.00-[9.00*.38]), and for B it was 7.44(12.00-[12.00*.38]). After that we kept the same cost of equity. After that we looked at Exhibit 6 on page 504 and used the “Total debt/capital, incl. short-term debt(%)” and use it as the weight of our debt for each rating. So for each rating we calculated the following weight of debt and equity: for AAA it was 5% debt and 95% equity (100%-5%), for AA it was 35.9% debt and 64.1% equity (100%-35.9%), for A it was 42.6% debt