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Choosing Financial Targets: Bixton Company's new chief financial officier is evaluating Bixton's capital structure.

Bixton Company's new chief financial officer is evaluating Bixton's capital structure. She is concerned that the firm might be over-leveraged, 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.

FUNDS FROM
RATING FIXED CHARGE OPERATIONS/ LONG-TERM DEBT/
CATEGORY COVERAGE TOTAL DEBT CAPITALIZATION
Aa 4.00 - 5.25x 60 - 80% 17 - 23%
Aa 3.00 - 4.30 45 - 65 22 - 32
Baa 1.95 - 3.40 35 - 55 30 - 41

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?

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?

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 "A" range. What target range would you recommend for each of the three credit measures?

Bixton's objective is to achieve a credit standing that falls, in the words of the chief financial officer, comfortably within the "A" range. Following target range would be recommended:

Fixed charge coverage: 3:00- 4.30
Funds From Operations/Total Debt: 45-65%
Long-term Debt/Capitalization: 22-32%

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

The term capital structure is used to represent the proportionate relationship between debt and shares. The various means of financing represent the financial structure of an enterprise. Thus the composition of debt and shares represents the capital structure of the firm. One should measure ...

Solution Summary

This response outlines the steps a company should take before deciding on their financial targets.

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