Blaine Kitchenware
CO
ORPOR
RATE F
FINANC
CE
C
CASE II
Blaine Kitche enwar re, Inc.
.: Capital Str ucture r e
Grou up Mem mbers Shivam m Pitaria (3
336/50)
Tanuj j Madan (37
76/50)
Vinit Bansal (395/50)
Yuvraj S
Singh Bist (402/50)
Q1 ‐ Is Blaine’s capital structure appropriate? Give reasons.
Blaine’s capital structure is not appropriate because of several reasons. The biggest of them being not using debt financing. Without debt, Blaine is not realizing its true potential. The firm would actually need plenty of capital if it wants to continue on the path of growth and make required acquisitions and expansion.
Although with increasing debt, the risk also increases; but due to tax reduction on interest of debt, the cost of capital would actually be lower. By being conservative and not going for debt, Blaine is actually hurting its growth prospects which in turn affects its shareholders.
One of the examples where we can see that Blaine is not performing to its potential is its extremely low ROE in 2006 as compared to its peers (Blain ROE = 11.0%, Mean ROE =
25.9%).
Additionally, the Payout ratio has been steadily increasing due to falling EPS and consistent dividends, which means a lot of cash is being used to pay the dividends in spite of falling
EPS.
Thus, we have come to the conclusion, that the capital structure of Blaine is not appropriate. Using debt financing judiciously would make it appropriate and would help
Blaine achieve its true potential. Q2 ‐ Should the CEO (Victor Dubinsky) recommend a large share re‐purchase to the Board of Directors? What, in your opinion, are the advantages and disadvantages of this option? We believe that Mr Victor Dubinsky should recommend the share repurchase to the board, biggest reason being excess liquidity and absence of debt financing. Number of
ORPOR
RATE F
FINANC
CE
C
CASE II
Blaine Kitche enwar re, Inc.
.: Capital Str ucture r e
Grou up Mem mbers Shivam m Pitaria (3
336/50)
Tanuj j Madan (37
76/50)
Vinit Bansal (395/50)
Yuvraj S
Singh Bist (402/50)
Q1 ‐ Is Blaine’s capital structure appropriate? Give reasons.
Blaine’s capital structure is not appropriate because of several reasons. The biggest of them being not using debt financing. Without debt, Blaine is not realizing its true potential. The firm would actually need plenty of capital if it wants to continue on the path of growth and make required acquisitions and expansion.
Although with increasing debt, the risk also increases; but due to tax reduction on interest of debt, the cost of capital would actually be lower. By being conservative and not going for debt, Blaine is actually hurting its growth prospects which in turn affects its shareholders.
One of the examples where we can see that Blaine is not performing to its potential is its extremely low ROE in 2006 as compared to its peers (Blain ROE = 11.0%, Mean ROE =
25.9%).
Additionally, the Payout ratio has been steadily increasing due to falling EPS and consistent dividends, which means a lot of cash is being used to pay the dividends in spite of falling
EPS.
Thus, we have come to the conclusion, that the capital structure of Blaine is not appropriate. Using debt financing judiciously would make it appropriate and would help
Blaine achieve its true potential. Q2 ‐ Should the CEO (Victor Dubinsky) recommend a large share re‐purchase to the Board of Directors? What, in your opinion, are the advantages and disadvantages of this option? We believe that Mr Victor Dubinsky should recommend the share repurchase to the board, biggest reason being excess liquidity and absence of debt financing. Number of