Presentation Transcript

1. DELUXE CORPORATION

   黃致嘉、端木偉葶、陳柏誠、戴肇逸、顏睿甫、呂建輝
2. Agenda Case brief Goal-Short-term financing Comparison of different financing instruments Line of credit Corporate Bond Issuing new shares Conclusion
3. Case brief Deluxe- a dominant player in the “Check-Printing” industry Maturity of industry: compound growth rate -4% (1998-2001) due to technological change Major restructuring of the firm: rationalize operations, reduced labor force, spin-off non-core business share price 65% over year 2001 Aggressive program of stock repurchase: share price in highest level in 10 years In this challenging operating environment, Deluxe needs continued financial flexibility to fend off eventual disintegration of its core business →Assess financial policies to steer towards survivability
4. Goal-Short-term financing Current and future financing requirements of Deluxe Working capital Capital asset purchase Possible acquisitions Repayment of outstanding debts Dividend payments Repurchasing the firm’s securities
5. Comparison of different financing instruments Benchmark Default risk DebttoEquityration (EBIT/WACC) Corporate Bond Commercial Paper : 1.85% Medium-term note :4.26% Long-term(unsecured) : 8.55% Line of credit : 4.26% Issuing new shares Cancombinewithbuybackcondition(Flexibility) Short-termvs.Medium-term vs.Long-termdecision Fixcondition Affect shareholders' equity and EPS
6. Line of credit(1/2) Loan from Bank Committed line of credit : $350 million which would expire in August 2002 Uncommitted line of credit : $50 million PROS A lasting relationship with the bank which may offer greater financial funding solutions needed in the future. The funds are available and more flexible than a standard bank loan. It remains open for a long period of time and can be used over and over again. If used properly, it can increase credit ratings
7. Line of credit(2/2) CONS High fees High interest rate Un-adjustable interests which may lead to high cost of defaulting v.s. Call provisions when issuing bonds to reduce the risks Suggestions: Practically, it’s more suitable for small business due to the information asymmetry DELUXE CORPORATION is a listed company and it costs more to borrow from the bank Do not use this method cause the cost is higher than issuing bonds
8. Corporate Bond(1/2) Advantages A very flexible way of raising debt capital. A way of stabilizing your company's finances by having substantial debts on a fixed-rate interest. It offers some protection against variable interest rates or economic changes. Disadvantages Reduce shareholder’s value - bond interest payments take precedence over dividends Bondholder restrictions – may impose certain covenants or undertakings on your business operations and financial performance to limit their risk
9. Corporate Bond(2/2) Suggestions 60% of the sales was from financial service and in 3 to 5 years contract, and the return of cash would be constant and stable. It only provides the prediction within 5 years in this case. So we prefer not to choice the long-term bond (pay interest on the principal and, in most cases, to return the principal when the bond comes due). Because it may not afford the principal by future cash flow.
10. Issuing new shares PROS Lower risk Non legal issues More flexibility CONS Dilution of shareholder’s equity Dilution control of the company Higher cost of equity(no taxshield)
11. Which one is better ? Higher Cost Lower Cost
12. Conclusion(1/2) Principle of decisions Value creation for shareholder Flexibility(equity is better) Lowest cost of capital Maintain the bond rating grade (A/A++) (equity is better)
13. Conclusion(2/2) Commercial Paper Medium-term note
14. Thank you Q&A