Fin Week 5 Problem Set

Fin Week 5 Problem Set

Chapter 17:
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. 1. 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? B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider? 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?
Rating Category Fixed Charge Coverage Funds From Operations/Total Debt Long-Term Debt/Capitalization
Aa 4.00–5.25x 60–80% 17–23%
A 3.00–4.30 45–65 22–32
Baa 1.95–3.40 35–55 30–41

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?

The A range:

Fixed Charge Coverage 3.00–4.30
Funds From Operations/Total Debt 45%–65%
Long-Term Debt/Capitalization   22%-32%

The company can attempt to sustain increased fixed coverage ratio, higher from operation/total debt ratio -near   65% - and to sustain lower long term debt to capitalization ratio -near to 22%

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


Company to completely apply non interest tax credits (foreign)
Cost of issuance to debt and expense (futuristic) in form of interest of the income level
Company can raise debt from the market
Effect of the...