DJ Week 5 Prob Set

DJ Week 5 Prob Set - Chapter 17 Problem B1(Choosing...

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Chapter 17: Problem B1 (Choosing financial targets) Bixton Company’s new chief financial officer is evaluating Bixton’s capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here. a. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures? Answer: To be “comfortably” within the range, the firm should stay off the low end of the ratings. Fixed Charge Coverage = 3.40 - 4.30 Cash Flow / Total Debt = 55 - 65 Long-Term Debt / Total Capitalization = 25 – 30 b. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider? Answer: Ability to use fully non-interest tax credits and debt management considerations such as issuance costs. The CFO should also consider that the the same percentage of debt to Bixton as to its competitors. c. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve? Answer: The CFO needs to consider R&D and foreign tax credits. The foreign tax credits are taken into consideration. Chapter 18: Problem A10 (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in
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This note was uploaded on 03/20/2011 for the course FIN 571 taught by Professor Dr.sherman during the Spring '10 term at University of Phoenix.

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DJ Week 5 Prob Set - Chapter 17 Problem B1(Choosing...

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