Week 5 Text Problem Sets

Week 5 Text Problem Sets

Rudy Mirador

FIN-571 Finance

Brian Mom

Aug. 16, 2010

Text Problem Sets

Ch. 17: Problem 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?

EBIT- earnings before interest and tax interest incurred before subtracting capitalized interest and interest income

Fix Charge Coverage = (EBIT + Fixed Charge before Tax)/ (Fixed Charge before tax) + interest

To be “comfortably” within the A range, the firm should stay off the low end of the ratings.

|Credit |Coverage Ratios |

|Ratings | |

| |Fixed Charge |Funds From OPS/Total |LT Debt/Cap: |

| |Coverage: |Debt: | |

|Aa |3.4 – 4.3% |55-65% |25-30% |

|A |3.-4.3% |45-65% |22-32% |

|Baa |3.-3.4% |35-55% |30-41% |

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

The CFO has to have the ability to use fully non-interest tax credits and debt management considerations such as issuance costs. Furthermore, he should also consider that the firm’s R&D is an intangible asset and that lenders may not be...