Blaine Kitchenware Case Study #1
Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
According to the current situation, we think Blaine’s current capital structure and payout policies are not appropriate. capital structure：
Blaine is currently over-liquid and under-levered. In this case, Blaine’s shareholders are suffering from the effects.
Because Blaine is a public company with large portion of its shares held by conservative family members, Blaine has huge financial surplus and causes bad financial leverage. In other words, Blaine does not fully utilize its funds. Because the company is totally equity financed, there is no tax shield. Excess cash will lower the return on equity and increase the cost of capital.
A huge amount of cash would not only offer possible acquirer incentives to buy Blaine with its own cash but also decrease the enterprise value of Blaine. In other words, acquirers could pay way less than they originally expect to buy out this family-based family. payout policies：
Regarding the payout policies, the dividend payout ratio from 2004 to 2007 is 35%, 43.6% and 52.9%. However, the management’s goal is to maximize the shareholder’s value, rather than paying dividend. Management should use all available cash in attractive investments.
Investors usually consider the periodical dividend as an evaluation for a healthy company. Although investors take dividend as an indicator for a company to succeed, they also expect dividend will be paid continuously at either stable or growing rate. But BKI knows that the recent trend in BKI’s payout ratio was unsustainable. In order for Blaine to keep its current payout policies, Blaine has to reduce numbers of outstanding shares throughout share repurchasing. In this case, the payout ratio would decrease as
According to the current situation, we think Blaine’s current capital structure and payout policies are not appropriate. capital structure：
Blaine is currently over-liquid and under-levered. In this case, Blaine’s shareholders are suffering from the effects.
Because Blaine is a public company with large portion of its shares held by conservative family members, Blaine has huge financial surplus and causes bad financial leverage. In other words, Blaine does not fully utilize its funds. Because the company is totally equity financed, there is no tax shield. Excess cash will lower the return on equity and increase the cost of capital.
A huge amount of cash would not only offer possible acquirer incentives to buy Blaine with its own cash but also decrease the enterprise value of Blaine. In other words, acquirers could pay way less than they originally expect to buy out this family-based family. payout policies：
Regarding the payout policies, the dividend payout ratio from 2004 to 2007 is 35%, 43.6% and 52.9%. However, the management’s goal is to maximize the shareholder’s value, rather than paying dividend. Management should use all available cash in attractive investments.
Investors usually consider the periodical dividend as an evaluation for a healthy company. Although investors take dividend as an indicator for a company to succeed, they also expect dividend will be paid continuously at either stable or growing rate. But BKI knows that the recent trend in BKI’s payout ratio was unsustainable. In order for Blaine to keep its current payout policies, Blaine has to reduce numbers of outstanding shares throughout share repurchasing. In this case, the payout ratio would decrease as