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Choosing Financial Targets & Dividend Plans - Bixton Company

(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 target range." What target range would you recommend for each of the three credit measures?
b. Before settling on these target ranges, what other factors should Bixton's chief financial officer consider?
c. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?
RATING Fixed charge coverage Funds From Operations/ Long term Debt
CATEGORY
Aa 4.00â?"5.25x 60%-80% 17-23%
A 3.00â?"4.30 45-65 22-32
Baa 1.95â?"3.40 35-55 30-41

2.)
(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm's chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes 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 $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

3.)
(Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.
a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.

1 2 3 4 5 THEREAFTER
Earnings 100 125 150 120 140 150+ per year Discretionary cash
flow 50 70 60 20 15 50+ per year

Solution Preview

a. Bixton's objective is to achieve a credit standing that falls, in the words of the chief financial officer, comfortably within the range. What target range would you recommend for each of the three credit measures?

The firm would want to stay at the low end of every rating -

Fixed charge coverage rating = 3.40 to 4.30
Cash flow to total debt = 55 - 65
Long term debt to total capitalization = 25 - 30

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

Other factors to consider always include the fact that R&D is an intangible asset. Oftentimes lenders are ...

Solution Summary

3 financial questions are answered in 399 words with calculations fully displayed. Includes topics like recommending a dividends policy for discretionary cash flow, using the dividend adjustment model and deciding target ranges for different credit measures.

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