Nonoe

In: Business and Management

Submitted By summertime08
Words 392
Pages 2
· Ch. 17: Problem B1

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?

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 = 45 - 65

Long-Term Debt / Total Capitalization = 22 - 32

B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?

Ability to use fully non-interest tax credits and debt management considerations such as issuance costs. The CFO should also consider that the firm’s R&D is an intangible asset and that lenders may not be willing to loan 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?

The CFO needs to consider R&D and foreign tax credits. The additional tax shield from additional debt may not be valuable when R&D and foreign tax credits are taken into consideration.

Rating Category Fixed Charge Coverage Funds From Operations/Total Debt Long-Term Debt/Capitalization

Aa

4.00–5.25x

60–80%

17–23%…...

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