Bixton Company\'s new chief financial officer is evaluating Bixton\'s capital st
ID: 2662617 • Letter: B
Question
Bixton Company's new chief financial officer is evaluating
Bixton's capital structure. She is concerned that the firm mightbe underleveraged, even
though the firm has larger-than-average research and developmentand foreign tax credits
when compared to other firms in its industry. Her staff preparedthe industry comparison
shown here.
a. Bixton's objective is to achieve a credit standing thatfalls, 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 factorsshould Bixton's chief financial
officer consider?
c. Before deciding whether the target ranges are reallyappropriate for Bixton in its current
financial situation, what key issues specific to Bixton must thechief financial officer
resolve?
Regional Software has made a bundle selling spreadsheet softwareand has begun paying cash dividends. The firm’s chieffinancial officer would like the firm to distribute 25% of itsannual earnings (POR = 0.25) and adjust the dividend rate tochanges in earnings per share at the rate ADJ = 0.75. Regional paid$1.00 per share in dividends last year. It will earn at least $8.00per share this year and each year in the foreseeable future. Usethe dividend adjustment model, Equation (18.1), to calculateprojected dividends per share for this year and the next four.
Explanation / Answer
a. To be “comfortably” within therange, the firm should stay off the low end of theratings.
FixedCharge Coverage = 3.40 - 4.30
Cash Flow/ Total Debt = 55 - 65
Long-TermDebt / Total Capitalization = 25 - 30
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