Blaine Case
Executive Summary:
In summary, recommendation by the banker to buy back 14 million outstanding shares of Blaine Kitchenware with $ 50 million debt and $209 million cash in hand would result in following financial metric changes: * Increase the value of the firm through the benefit of tax shield from current $960million to $1.063billion. * The offer results in 3% increase in EPS from $0.91 to $0.93 based on 2006 financial numbers. * An increase of 7.3% on ROE from 11% to 18.3% based on 2006 financial numbers. * After adjustment, share prices will be $18.0.
Proposed Buy-Back Plan Analysis:
Although Blaine’s current financial situation is sound with no debt, its current balance sheet is under levered and over liquid compare to its peers. The current financial structure earns little return on the short-term assets while does not allow the firm to benefit from any debt interest tax shield. The proposed capital structure will benefit the company by levering its balance sheet. It will provide an interest tax shield for the income thus increasing the value of the firm for the shareholders. Because interest on debt is a tax-deductible expense, taking on debt will effectively lower the taxable income allowing the firm to pay less tax.
The current large cash and short-term marketable securities on the balance sheet make Blaine an attractive target for a take-over. The large cash on balance sheet could effectively be used as a collateral to finance a take-over or merger of Blaine. Such characteristics attract private equity firms in which can utilize the over-liquid situation to their advantage.
The current mature nature of business also requires a levered capital structure. A firm in this situation should not follow a pecking order, as it would hold down the value of the firm while making it attractive for a take-over or merger. Less cash in balance sheet also reduces agency cost by forcing managers to invest only in opportunities that are
In summary, recommendation by the banker to buy back 14 million outstanding shares of Blaine Kitchenware with $ 50 million debt and $209 million cash in hand would result in following financial metric changes: * Increase the value of the firm through the benefit of tax shield from current $960million to $1.063billion. * The offer results in 3% increase in EPS from $0.91 to $0.93 based on 2006 financial numbers. * An increase of 7.3% on ROE from 11% to 18.3% based on 2006 financial numbers. * After adjustment, share prices will be $18.0.
Proposed Buy-Back Plan Analysis:
Although Blaine’s current financial situation is sound with no debt, its current balance sheet is under levered and over liquid compare to its peers. The current financial structure earns little return on the short-term assets while does not allow the firm to benefit from any debt interest tax shield. The proposed capital structure will benefit the company by levering its balance sheet. It will provide an interest tax shield for the income thus increasing the value of the firm for the shareholders. Because interest on debt is a tax-deductible expense, taking on debt will effectively lower the taxable income allowing the firm to pay less tax.
The current large cash and short-term marketable securities on the balance sheet make Blaine an attractive target for a take-over. The large cash on balance sheet could effectively be used as a collateral to finance a take-over or merger of Blaine. Such characteristics attract private equity firms in which can utilize the over-liquid situation to their advantage.
The current mature nature of business also requires a levered capital structure. A firm in this situation should not follow a pecking order, as it would hold down the value of the firm while making it attractive for a take-over or merger. Less cash in balance sheet also reduces agency cost by forcing managers to invest only in opportunities that are