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    Deluxe Corp

    Uploaded by

    Udit Upreti
    The document analyzes Deluxe Corporation's cost of equity and weighted average cost of capital (WACC) under different credit ratings. It estimates Deluxe's cost of equity using two methods - the Hudson model and the Capital Asset Pricing Model (CAPM). It also calculates the company's WACC based on these equity costs and implied capital structures. The analysis shows the cost of equity and WACC generally increase as the credit rating declines from AAA to B.

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    © All Rights Reserved
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    Deluxe Corp

    Uploaded by

    Udit Upreti
    557 views7 pages
    The document analyzes Deluxe Corporation's cost of equity and weighted average cost of capital (WACC) under different credit ratings. It estimates Deluxe's cost of equity using two methods - the Hudson model and the Capital Asset Pricing Model (CAPM). It also calculates the company's WACC based on these equity costs and implied capital structures. The analysis shows the cost of equity and WACC generally increase as the credit rating declines from AAA to B.

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    Deluxe Corp calculation

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    The document analyzes Deluxe Corporation's cost of equity and weighted average cost of capital (WACC) under different credit ratings. It estimates Deluxe's cost of equity using two methods - the Hudson model and the Capital Asset Pricing Model (CAPM). It also calculates the company's WACC based on these equity costs and implied capital structures. The analysis shows the cost of equity and WACC generally increase as the credit rating declines from AAA to B.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    557 views7 pages

    Deluxe Corp

    Uploaded by

    Udit Upreti
    The document analyzes Deluxe Corporation's cost of equity and weighted average cost of capital (WACC) under different credit ratings. It estimates Deluxe's cost of equity using two methods - the Hudson model and the Capital Asset Pricing Model (CAPM). It also calculates the company's WACC based on these equity costs and implied capital structures. The analysis shows the cost of equity and WACC generally increase as the credit rating declines from AAA to B.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 7

    AAA

    Pretax cost of debt (Exhibit 9)


    Required EBIT interest coverage (Exhibit 6)
    Estimate of Maximum Debt Capacity
    Normalized 5-Year EBIT (Exhibit 4)
    Maximum interest implied by rating
    Maximum total debt implied by rating
    Downside EBIT
    Maximum interest implied by rating
    Maximum total debt implied by rating
    Estimate of unused Debt Capacity
    Book value of Deluxe's existing debt
    Maximum debt implied by rating
    unused debt capacity at current rating
    unused capacity until investment grate rating is lost (atBB)

    Estimate of Capital Structure


    Deluxe corporation market value of Equity
    Maximum debt implied by rating
    Total debt/equity implied by rating

    AA
    5.51%
    23.4

    5.52%
    13.3

    359.42
    15
    279
    200
    9
    155

    359.42
    27
    490
    200
    15
    272

    161
    279
    117.76
    1534.48

    161
    490
    328.57
    1323.67

    2665
    279
    10.46%

    2665
    490
    18.37%

    BBB

    BB

    5.70%
    6.3

    6.33%
    3.9

    9.01%
    2.2

    11.97%
    1

    359.42
    57
    1001
    200
    32
    557

    359.42
    92
    1456
    200
    51
    810

    359.42
    163
    1813
    200
    91
    1009

    359.42
    359
    3003
    200
    200
    1671

    161
    1001
    839.89
    812.35

    161
    1456
    1294.91
    357.33

    2665
    1001
    37.56%

    2665
    1456
    54.63%

    161
    161
    1813
    3003
    1652.24 2841.67
    0.00 -1189.44

    2665
    1813
    68.04%

    2665
    3003
    112.67%

    cost fo debt (pretax)


    cost of equity

    Approach based on Hudson Bancorp Estimates of Equity costs


    Tax rate @38%
    After-tax cost of debt
    cost of equity
    Debt/capital (Exhibit 6)
    Weight of debt (implied by coverage ratio)
    Weight of Equity
    WACC (using market weights)

    Alternative approach based on CAPM and Levered Beta


    cost of debt (pretax)
    Unlevered beta
    Debt/equity (Market)
    Levered beta
    cost of equity (rf=0.0530, MP=0.054)
    After-tax cost of debt
    Cost of equity
    Debt/capital book value Exhibit 6
    Weight of debt (implied by coverage ratio)
    Weight of equity
    WACC (using market weights)

    AAA

    AA

    BBB

    BB

    5.47%
    10.25%

    5.50%
    10.35%

    5.70%
    10.50%

    6.30%
    10.60%

    9%
    12%

    12%
    14.25%

    3.39%
    10.25%
    5%
    9.50%
    90.5%

    3.41%
    10.35%
    35.90%
    15.50%
    84.5%

    3.53%
    10.50%
    42.60%
    27.30%
    72.7%

    3.91%
    10.60%
    47%
    35.30%
    64.7%

    5.58%
    12.00%
    57.70%
    40.50%
    59.5%

    7.44%
    14.25%
    75.10%
    53.00%
    47.0%

    9.60%

    9.27%

    8.60%

    8.24%

    9.40%

    10.64%

    5.47%
    0.82
    10.46%
    0.87
    10.02%

    5.50%
    0.82
    18.37%
    0.91
    10.23%

    5.70%
    0.82
    37.56%
    1.01
    10.76%

    6.30%
    0.82
    54.63%
    1.10
    11.23%

    9.00%
    0.82
    68.04%
    1.17
    11.60%

    12.00%
    0.82
    112.67%
    1.39
    12.82%

    3.39%
    10.02%
    5.0%
    9.50%
    90.5%

    3.41%
    10.23%
    35.9%
    15.50%
    84.5%

    3.53%
    10.76%
    42.6%
    27.30%
    72.7%

    3.91%
    11.23%
    47.0%
    35.30%
    64.7%

    5.58%
    11.60%
    57.7%
    40.50%
    59.5%

    7.44%
    12.82%
    75.1%
    53.0%
    47.0%

    9.39%

    9.17%

    8.79%

    8.64%

    9.16%

    9.97%

    0.848007

    Cost of Equity
    Rating
    Hudson
    CAPM
    AAA
    10.25%
    10.02%
    AA
    10.35%
    10.23%
    A
    10.50%
    10.76%
    BBB
    10.60%
    11.23%
    BB
    12%
    11.60%
    B
    14.25%
    12.82%

    Deluxe Cor
    16.00%
    14.00%
    12.00%
    10.00%
    Axis Title

    8.00%
    6.00%
    4.00%
    2.00%
    0.00%
    AAA

    WACC Calculation
    Rating
    Hudson
    CAPM
    AAA
    9.60%
    9.39%
    AA
    9.27%
    9.18%
    A
    8.60%
    8.79%
    BBB
    8.24%
    8.64%
    BB
    9.40%
    9.16%
    B
    10.64%
    9.97%

    AA

    Char
    12.00%
    10.00%
    8.00%
    Axis Title

    6.00%
    4.00%
    2.00%
    0.00%
    AAA

    AA

    Deluxe Corporation

    0%

    0%

    0%
    Hudson

    0%

    CAPM

    0%

    0%

    0%

    0%

    0%
    AAA

    AA

    BBB

    BB

    Chart Title

    .00%

    .00%

    .00%

    Hudson
    CAPM

    .00%

    .00%

    .00%

    .00%
    AAA

    AA

    BBB

    BB

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