Blaine Kitchware
Question 1:
The investment banker commented that Blaine was “over-liquid and under-levered” due to the fact that Blaine was debt-free and also held $231 million in cash, a 39% of its total assets. The pros of this type of capital structure are that it gives the company more freedom when making business decision and disturbing its cash. And the company with more liquidity reacts quicker under an economic or industry hardship. The cons of this type of capital structure are that it is wasting the potential of expanding its business by leveraging/borrowing. Too large of a cash position also signal waste as the funds are generating very little return as well as make the company a takeover target. The shareholders generally expect the company to return the cash to shareholders if it is not needed for operation.
One of the reasons why this type of capital structure makes sense to Blaine so far is that the culture of the company does not favor borrowing. Only twice in its history had the company borrowed beyond seasonal working capital needs; one was during the WW II and one was during the first oil shock. And both of the debt was repaid as quickly as possible. The capital structure make senses to shareholders since the majority of shareholders are family members descended from the firm’s founders who generally understand the history, culture and the strategy of the company. And it also makes sense in light of Mr. Dubinski’s strategies since taking over as CEO as he’s been focused on several acquisitions to expand the business, which need a large cash position to stay competitive to other acquires as well as be able to acquire the firms.
Question 2:
A. Please refer to the spreadsheet attached.
B. With the implantation of the stock repurchase proposal, the EPS will increase from 0.91 to 0.93 for 2006, and will grow to 1.39 instead of 1.26 in 2010 assuming a 10% in EBIT per year. The ROE ratio for 2006 will grow from 10.98% to 18.29%. Also, the enterprise value of
The investment banker commented that Blaine was “over-liquid and under-levered” due to the fact that Blaine was debt-free and also held $231 million in cash, a 39% of its total assets. The pros of this type of capital structure are that it gives the company more freedom when making business decision and disturbing its cash. And the company with more liquidity reacts quicker under an economic or industry hardship. The cons of this type of capital structure are that it is wasting the potential of expanding its business by leveraging/borrowing. Too large of a cash position also signal waste as the funds are generating very little return as well as make the company a takeover target. The shareholders generally expect the company to return the cash to shareholders if it is not needed for operation.
One of the reasons why this type of capital structure makes sense to Blaine so far is that the culture of the company does not favor borrowing. Only twice in its history had the company borrowed beyond seasonal working capital needs; one was during the WW II and one was during the first oil shock. And both of the debt was repaid as quickly as possible. The capital structure make senses to shareholders since the majority of shareholders are family members descended from the firm’s founders who generally understand the history, culture and the strategy of the company. And it also makes sense in light of Mr. Dubinski’s strategies since taking over as CEO as he’s been focused on several acquisitions to expand the business, which need a large cash position to stay competitive to other acquires as well as be able to acquire the firms.
Question 2:
A. Please refer to the spreadsheet attached.
B. With the implantation of the stock repurchase proposal, the EPS will increase from 0.91 to 0.93 for 2006, and will grow to 1.39 instead of 1.26 in 2010 assuming a 10% in EBIT per year. The ROE ratio for 2006 will grow from 10.98% to 18.29%. Also, the enterprise value of