1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years?

1. What are the risks associated with Deluxe’s business and strategy? What financing requirements do you foresee for the firm in the coming years?

2. What are the main objectives of the financial policy that Rajat Singh must recommend to Deluxe Corporation’s board of directors?

3. Drawing on the financial ratios in case Exhibit 6, how much debt could Deluxe borrow at each rating level? What capitalization ratios would result from the borrowings implied by each rating category?

4. Is Deluxe’s current debt level appropriate? Why or why not?

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? 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?

6. What should Singh recommend regarding:

· the target bond rating

· the level of flexibility or reserves

· the mix of debt and equity

· any other issues you believe should be brought to the attention of the CEO and the board

P.S. These questions do require calculations but their accuracy is not critical. It will be enough to provide well explained opinions with supporting analysis.

Synopsis

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 firm’s core business.

The objective is to recommend an appropriate financial policy for Deluxe Corporation and, in support of that recommendation, it is recommended to show the impact on the cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.