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QUESTION 5Is Deluxe current debt level appropriate? Why or why not?

Clearly, Deluxe's current level of debt does not seem appropriate. Referring to exhibit 4, the company is currently utilizing debt of $161.50 million. We have tried to calculate maximum and minimum level of debt the company can afford to take. The summary of maximum and minimum debt Deluxe can borrow at each rating category is shown below.

AAA AA A BBB BB B

Maximum debt 240.79 421.33 856.26 1,254.38 1,556.57 2,568.33

Minimum debt 156.25 273.41 556.95 814.00 1,010.10 1,666.67

Maximum level of debt Deluxe can borrow at each rating category is derived in answer no.3 and4. The target debt level must be the one that minimizes the cost of capital. Considering market value of equity, minimum WACC is obtained at BBB. The optimum debt level for Deluxe would-be $1254.38 million with the debt equity ratio of 33:67.Now considering the worst case scenario, according to Mr. Singh, EBIT shall not be less than$200 million. Again the minimum WACC is maintained at investment grade of BBB. The optimum debt level for Deluxe would be $814 million with the debt equity ratio of 24:76.refer to last table so we may conclude that Deluxe Corporation has been underutilizing its debt capacity. The company has not yet achieved a minimum debt of $814 million. It can easily increase debt ratio and still maintain the investment grade.