B1. (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 ‘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?
a. To recommend a target range for each of the three credit measures, the chief financial officer should consider the industry comparison provided by her staff. She should analyze the credit standing of other firms in the industry that have similar research and development and foreign tax credits as Bixton. By evaluating the credit ratings of these firms, she can determine the range within which Bixton's credit standing should fall.
b. Besides the industry comparison, there are other factors that the chief financial officer should consider before settling on target ranges for credit measures. These factors may include:
- Bixton's financial goals and objectives: The target ranges should align with Bixton's overall financial strategy and objectives.
- Economic conditions: The CFO should consider the prevailing economic conditions, interest rates, and market trends that may impact Bixton's capital structure and credit standing.
- Competitive landscape: The CFO should be aware of how Bixton's credit measures compare to its competitors. Understanding the industry norms and benchmarks can provide valuable insights.
- Future funding requirements: Bixton's future growth plans and funding needs should also be taken into account. The target ranges should ensure that Bixton can access the necessary capital in the future.
c. Before determining the appropriateness of the target ranges for Bixton, the chief financial officer must resolve key issues specific to Bixton's current financial situation. These issues may include:
- Bixton's current capital structure: The CFO needs to evaluate the existing capital structure and determine if it is underleveraged or overleveraged. This assessment will help in setting appropriate target ranges.
- Bixton's financial performance: The CFO should assess Bixton's financial health, profitability, and cash flow generation to understand its ability to meet the target credit measures.
- Tax implications: Considering Bixton's larger-than-average foreign tax credits, the CFO needs to evaluate the impact of these credits on Bixton's overall credit standing.
- Risk tolerance: The CFO should consider Bixton's risk appetite and evaluate the level of risk associated with different target ranges for credit measures.
By addressing these specific issues, the CFO can determine whether the target ranges identified in part a) are suitable for Bixton in its current financial situation.