Synopsis and Objectives
Suggestions for complementary cases in capital structure choice and financial flexibility: “The Wm. Wrigley, Jr. Company: Capital Structure, Valuation, and Cost of Capital,” (case 30); “Rosario Acero S.A.,” (case 32); “Gainesboro Machine Tools Corporation,” (case 25) In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the …show more content…
Depending on the instructor’s objectives, however, and the time available for student preparation, the following readings would deepen the students’ engagement in this case.
Barclay, Michael J., and Clifford W. Smith Jr. “On Financial Architecture: Leverage, Maturity, and Priority.” Journal of Applied Corporate Finance (Winter 1996): 4–17.
Donaldson, Gordon. Strategy for Financial Mobility. (Homewood, IL: Irwin, 1971).
Macdonald, Wakeman L. “The Real Function of Bond Rating Agencies.” Journal of Applied Corporate Finance (Fall 1983). Reprinted in The Revolution in Corporate Finance. 3d ed. Joel M. Stern and Donald H. Chew Jr., ed. (Malden, MA: Blackwell, 1998): 25–28.
Hypothetical Teaching Plan
1. What is the nature of Deluxe Corporation’s business? How would you describe the firm’s strategy? What are the risks?
2. What are management’s motivations and key objectives in setting the firm’s financial policy?
3. What financing requirements do you foresee for Deluxe Corporation in the coming years?
4. How large will Deluxe’s financial reserves be under each credit rating category?
5. Using Hudson Bancorp’s estimates of the costs of debt and equity in case Exhibit 8, which rating category has the lowest overall cost of funds?
6. Do you think Deluxe Corporation’s current level of debt is appropriate?
7. What financial policy would you recommend for Deluxe?