Fin571 Week 5 Problem Sets

Week 5 Text Problem Sets

Felicia N. Lamar

September 19, 2010


University of Phoenix

Denny Frischkorn

Week 5 Text Problem Sets Exercises

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.

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?
Since the CFO wants to be “comfortably within the ‘A’ range”, then the ideal target range for each credit measure should be off of the low end of the credit ratings.
Fixed Charge Coverage = 3.40-4.30 range
Funds from Operations/Total Debt = 55-65
Long-term Debt/Capitalization = 25-30

B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?
The CFO should consider how fully the company uses its non-interest tax credits and manages other debts like insurance costs. Also, they need to examine their assets that are intangible in nature. These intangible assets can lead to lenders not being willing to loan to Bixton like other companies

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?
Before deciding whether the target ranges are appropriate, the CFO should resolve the use of foreign tax credits and research and design. When these two factors are considered the CFO may find that other tax shields are not as valuable as believed.

Chapter 18 A10:

(Dividend Adjustment Model) Regional Software has...