The Deluxe Corp was the dominating player on check printing industry and pioneer. Rajat Singh, an overseeing executive at Hudson Bancorp, required identifying how to restore the paper check company. One fundamental part that should be computed is the appropriate mix of equity and debt for the firm.
The organization needs to decide the right blend with the goal that they can both minimize the cost of capital and increment the shareholders value. Along with this, it will be dissected regarding the present and future circumstance of the organization, as well as attempting to identify the correct rating score to utilize that will expand the income. With the new credit rating score, it would be easy to determine the level of debt for the company that make more profitable.
The objective of the case is to determine the appropriate financial policy for the company by showing the impact of financial flexibility, cost of capital and bond rating. Therefore, it would require determining the corporate bond ratings and identifying the risks firm is currently facing after the decline, what further risks it may face in the future, the financial requirements the firm needs, objectives of the financial requirements, and the influence that the new financial policy has on the credit ratings of the company based on Standards & Poor and Moody’s, and on the capitalization ratios of the company.
For the corporate bond rating, the bond rate would be assumed as default risk and higher debt level would lead to higher default risk and low credit rating. For the mix of debt and equity, the optimal structure is 60% to 40%. The company manages to structure the optimal value that will help to maintain the bond rating for achieving the goal of financial stability and higher profits.
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?
Deluxe Corporation was at one time the biggest printer of paper checks in the United States. However, since the past few years, it began to face challenges on its sales and income development and growth due to different payment system as online credit and debit card payment and some of otherrisks that Deluxe Corporation is confronting are:
- Printer paper checks: Deluxe Corporation was occupied with the matter of making printer paper checks in the area of the United States of America. In the current situation, the organization had released all of its long term debt obligations and had not even issued a major bond in about 10 years.
- Decease in demand: Despite the fact that the company’s products were at developed and mature stages, the CEO of the Deluxe Corporation, Lawrence J. Mosner, foresaw reduction in the demand of the products. Singh determined that there was 1% to 3% decline in paper checks and would further decline in the future.
- With the increase in competition in the use of technology, for instance, e-exchanges, ATMs, Debit and Credit Cards, the old products will be obsolete. As an aftereffect of that, there will be low scope or range for the new products in the current line of business.
- By the CEO, the printing papers business has nearly come to its peak point and starting now and into the foreseeable future demand will just decline and the probability of sales and growth is low
- Huge competition: There are a few participants in whole business that govern the business, since the printing business typically operates at big economies of scale, and in light of this the potential conflict in costs would be a risk in future time period.
- The liquidity and operational risk is examined due to the uneven working capital since last 10 years. Hence, it would result in positive ratio which shows the company’s ability to pay out the current liabilities however; it is analyzed that the company would face difficulty in paying the current liabilities in the future.
- The company has low bond credit rating because the company has issued debt and the low credit rating does not allow the company to take further loan at cheaper rate. Therefore, it increases the cost of capital and it requires maintaining the bond rating through optimization of debt and equity mix.
- Delux is facing financial flexibility that resulted in the decrease in the long term debt level and therefore, it requires indulging with the reinvestment grade that will improve the credit rating of the company and would help to access debt at cheaper rates............................