Week 4

Lenders are more willing to lend a larger proportion of the market value of tangible assets than intangible assets.   The reason is that the market for tangible assets is more liquid than the market for intangible and in the case of bankruptcy the lender would like to get the best price for the assets as fast as possible.   The lender is therefore more willing to lend a higher percentage of the value of tangible than intangible assets

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?
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

a. To be “comfortably” within the range, the firm should stay off the low end of the ratings.
Fixed Charge Coverage = 3.40 - 4.30
Cash Flow / Total Debt = 45 - 65
Long-Term Debt / Total Capitalization = 22 - 32
b. Ability to use fully non-interest tax credits and debt management considerations such as issuance costs.   The CFO should also consider that the firm’s R&D is an intangible asset and that lenders may not be willing to loan the same percentage of debt to Bixton as to its competitors.
c.   The CFO needs to consider R&D and foreign tax credits.   The additional tax shield from additional debt may not be valuable when...