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Finance Problems - Speech or Presentation Example

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(17-B1 Choosing financial targets) Bixton Companys new chief financial officer is evaluating Bixtons capital structure. She is concerned that the firm might be under leveraged, even though the firm has larger-than-average research and development and foreign tax credits when…
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Finance Problems
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Download file to see previous pages In order for the company to have the credit standing “comfortably within the A range,” the target range to be chosen should be at the lower end of the ranges, or the upper limit of the lower rating as its lower limit, and the upper limit of the A rating for the upper limit. Thus, for the fixed charge, the company must choose 3.40x – 4.30x; the lower limit is the upper limit for the Baa rating. For the funds from operations/total debt, the range should be 55-65; 55 being the upper limit for Baa. For the long-term debt/capitalization, the range should be 22-30; the 30% being the lower limit for the Baa rating, rating below the A rating.
One of the factors to be included in the decision include the companys research and development spending, which as mentioned in the question can be assumed as capitalized and part of the intangible asset of the company. Because this is an intangible, other investors may not buy into it as a security in terms of providing higher amounts of loans to the company, compared to its competitors. While it has higher than average spending for R&D, this is not a tangible cost that could back up any claims for insolvency, which is also a concern to the investors. Also, the companys ability to use other tax credits is another consideration for settling with the target ranges, because these has effect on the three key figures for the company to qualify for a certain credit rating.
Because R&D is capitalized, the additional tax credits by increasing the leverage may not be so significant to the company when R&D is capitalized into intangibles. Because it invests in higher than average R&D, and has higher foreign credits, if these are not affected by increasing the financial leverage of the company, it does not give huge benefit to the company in the process.
II. (18-A10 Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash ...Download file to see next pagesRead More
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