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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