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Case Title Blaine Kitchenware Inc. Capital Structure Price   $75
   
Solution ID 1033
Case ID 4040
Spreadsheet

Calculations of Repurchase Proposal

Remaining Shares, Net Income, Revised Equity, EPS, ROE, Interest Coverage Ratio, Debt to Equity Ratio

Abstract

Blaine kitchenware has maintained a consistent dividend per share in the past few years, which is usually a good indicator. However, the company has also issued substantial amount of shares in the past three years in order to fund their acquisitions. Unfortunately, the company is holding a substantial amount of cash, which could have been invested to maximize profitability. As a result, the profits have not grown proportionately with the capital raised through ordinary shareholders. The company’s earnings per share have decreased, while it has tried to maintain its dividend per share. Therefore, the company’s payout ratio has increased considerably from 35% in 2004 to 52.9% in 2006. The company operates in a competitive environment, and needs to invest its profits in profitable opportunities in order to maintain its competitive edge. Therefore, the increase in payout ratio is not appropriate, as the company will be better-off reinvesting these funds within the company.

No of Words 1766
Questions Covered
  1. Do you believe Blaine’scurrent capital structure and payout policies are appropriate? Why or why not?
  2. Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move?
  3. Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, BKI’s earnings per share and ROE, its interest coverage and debt ratios, the family’s ownership interest, and the company’s cost of capital.
  4. As a member of Blaine’s controlling family, would you be in favor of this proposal? Would you be in favor of it as a non-family shareholder?
  5. How does the proposal in question 3 differ from a special dividend of $4.39 per share?
  6. Suppose that Mr. Dubinsky has obtained from Blaine’s banker the quotes below for default spreads over 10 year Treasury bonds [note that these differ from the more general bond yields in case Exhibit 4]. What do these quotes imply about Blaine’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure? Based on these calculations, how many shares should Blaine repurchase and at what price? 
Keywords Capital structure, Financial strategy
   
Status Available
 

 

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