DeluxeCorporation

Problem: Deluxe Corporation needs to decide the most suitable capital structure to reflect on the

competing goals of value creation, flexibility, and bond rating.

CostofCapital:

Ø Calculatedbasedonanunleveredbetaof.81Ø BBBbondratingmaintainsthelowestcostofcapitalof

9.99%

OurRecommendation:v LongTerm:Takeon$1.1billiondollarsinlongtermnotespayableataninterestrateof3.96%.

MovedowntoBBBratingwhilestillpreservinginvestmentgraderatingØ ShortTerm:Maintaintheoptiontousetheremaining$150millionincommercialpaper

§ Completeoutstanding$115millioninstockrepurchaseandinitiatenew$385millionsharerepurchaseprogram

Ø Assumptions:

MarketValueEquity $2,665.36MMMarketValueDebt $161.47MMEnterpriseValue $2,826.83MM2001currentWACC 10%GrowthRate 2%CurrentStockPrice $41.58TaxRate 38%MarketRiskPremium 6.2%RiskFreeRate(10Yr.Notes) 4.46%

PrimaryObjectives:v Flexibility:

Ø Maintainfinancialoperatingrequirementsv BondRating:

Ø Maintaininvestmentgradeandreputationv CostofCapital:

Ø Minimizecostofcapitalwhilemaximizingshareholdervalue

DiscountedCashFlowValuation:v Discountedcashflow:$2,651.47MMv MarketValueofDebt:$161.47MMv MarketValueofEquity:$2,490.00MMv Resultsinanintrinsicsharepriceof$38.84v Stockpriceisovervalued

Ø Premiumpershare$2.736or6.58%

UseofFunds:

v Finishcurrentstockrepurchaseprogramof$115MM

v Launchfuturesharerepurchaseof$385MMToaddresscurrentandfuturecompany

financingrequirements:v Retain$150MMcommercial-paper

programØ Lowandattractiveinterestrateof

1.85%Ø Liquidoptionfurtherincreases

flexibilityv Issue$1.1billioninlongtermnotes

payablewithinterestrateof3.96%Ø Retainsinvestmentgraderating

DebtRating:

- FlexibilityisacorerequirementforfinancialpolicyofDeluxeCorporationo BBBratingallowsareserve

- Aftertaxcostofdebtserviceisprojectedat$39.6milliondollarsannuallyo Leadstoacoverageratioof6.8xversusprior55.2xduetoincreasedinteresto $39.6millionequals21.3%oflastyear’snetearnings,makingthisamanageable,yetmaterial

expense

o NewdebtloadkeepsDeluxecomfortablewithininvestmentgradeguidelinesexceptforfunds

fromoperations/totaldebt(closetoBBBlevel)o Basedoncompetitiveanalysis,Deluxewillnotfalloutofinvestmentgradeo Preservationofinvestmentgraderatingavoidsunnecessaryreputationdamage

Flexibility:

v BBBprovidesthegreatestflexibilitywhileremaininginvestmentgradev Greatestamountofdebtthatcanbeissuedis$1,455.83MMv Amountunusedis$1,294MMwhichis88.91%

Ø Providesgreatestflexibilitytofinanceoperatingactivitieswhileprovidingthelowestcostofcapital