What capital structure model does ththe CFO appear to follow to maintain a credit rating of AA?
A CFO says that her firm chooses a capital structure that allows it to maintain a credit rating of AA. She reasons that a credit rating of AAA would be too conservative, but seeing anything less than AA would be too risky.
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This is a great question. It is a bit odd that a CFO would want a credit rating of AA instead of AAA. I would say that this is not a typical strategy, but there could be a few reasons why this is the desired approach.
First, in this economic climate there is not a huge difference between AAA and AA. For example, the United States has been downgraded to an AA ratings. So, an AA rating is still very much a solid rating, which shows credit worthiness. Moreover, not many companies are now AAA.
Second, this AA rating may give the impression that a company is daring and willing to take risks. This may communicate to some that this company is both financially responsible and also willing to go where others will not. In other words, they have vision and have a heart to blaze a new trail.
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