Q.No.

6) What should Singh recommend regarding:

the target bond rating
the level of flexibility or reserves
the mix of debt and equity
Solution:
Target bond rating
After the calculation and analysis of different types of bond rating, it is found that BBB isthe most
appropriate one because WACC is comparatively lower in comparison to othertypes of bond ratings. The
lower the value of WACC, the better will be the bond ratingsand the most important thing is that BBB
lies on the investment grade. If Maximum levelof debt is taken under BBB, then WACC will be 8.43% and
if minimum level of debt istaken under BBB then the value of WACC will be 8.99%.
The level of flexibility or reserves
Flexibility enables Deluxe Corporation to achieve a better 'fit' with their environment andcreate a
sustainable competitive advantage. In this case level of flexibility in case of debtfor Deluxe Corporation
under BBB rating is from $814millions to $1254.38millions. Formaximum level of debt it is
$1254.38millions and for minimum level of debt it is814millions. So, the reserve for Deluxe Corporation
is ($1254.38- $814) millions.
The mix of debt and equity
Under BBB ratings, the mix of debt to equity for maximum level of debt is 0.33:0.67.The mix of debt to
equity is 0.24: 0.76 for minimum level of debt