Case 35: Stock Repurchase Program Recommendation

Topics: Cash flow, Stock market, Stock Pages: 3 (1167 words) Published: April 18, 2013
To:Rajat Singh, managing director at Hudson Bancorp
Re:Stock Repurchase Program Recommendation

The purpose of this memo is to examine whether Deluxe Corporation should increase borrowings to buyback stocks. After considerable analysis of the company’s financial position, we recommend that Deluxe Corp. to borrow up to $1.023 billion to buy back 34,175 shares. In order to achieve this, Deluxe will need to lower its bond rating from A rating to BBB , which results in a decrease in WACC from 11.47% to 9.95%. By doing this, Deluxe ’s WACC is minimized, yet the bond rating is still at investment –grade rating; plus, the firm will have a financial flexibility of $872 million, and an increase in its equity value per share by $35.34. This memo explains in detail the calculation of the current WACC, the current intrinsic equity value, the unused debt capacity at different ratings, and the recommended WACC as well as the estimated increase in equity value with respect to the new WACC at the recommended debt borrowing level. Current WACC

Based on our calculation, the current WACC is 11.47% as of August 01, 2002. In this calculation, for the borrowing rate, we use 5.70% regarding Deluxe’s bond rate A from Exhibit 8. The marginal tax rate is is projected to be 38%. We use 5.41% for the risk free rate of return with respect to the 20 years U.S Treasury bond. The equity risk premium and beta are given at 6% and .85, respectively. Since the beginning of 2002, Deluxe had retired all of its long term debt, we calculate the total debt by adding the short-term debt and the long-term debt due within one year to arrive at $151 million; for the total equity, we multiply the number of shares outstanding which is given in the company’s 2001 Financial Summary, by the market adjusted close price per share which we look up in yahoo finance to get to $1,568 million. For the small stock risk premium, we use 1.73% as Deluxe’s total equity is between...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Stock Repurchase Essay
  • Gm Stock Repurchase Recommendation Essay
  • Case 35. Q4 Essay
  • Stock Repurchase Assignment Essay
  • Essay about Stock Case
  • Dell Computer Corporation: Share Repurchase Program Essay
  • Stock Essay

Become a StudyMode Member

Sign Up - It's Free