Evaluation on Share Repurchase Proposal of Blaine Kitchenware Inc.
Evaluation on Share Repurchase Proposal of Blaine Kitchenware Inc.
Group 7
Contents
Executive Summary 3
Overview of problems 3
Analysis on Capital Structure & Payout Policies of Blaine 3
1. Inappropriate current capital structure and payout policies 3
2. Advantages and disadvantages of large share repurchase proposal 4
a. Effects of share repurchase on assets, liabilities and equity on balance sheet 5
b. Effects of share repurchase on debt ratios and interest coverage ratio 5
c. Effects of share repurchase on Earnings Per Share and Return On Equity 5
d. Bonus question—effects on wacc 6
4. Effects of the proposed share repurchase on shareholders 6
Appendix 7
Executive Summary
The main problem faced by BKI is over liquidity and under leverage. The capital structure of Blaine is too conservative. The main source of funding for business comes from equity capital. It would not be rational for a public company to be funded only by equity, which caused the company’s Return on Equity much lower than the industry average. In the meantime, current payout policies make payout ratio go up, lowering efficiency of the firm. The company can solve these problems by issuing debt to repurchase its stock. Debt is a lower cost source of financing and allows a higher return to the. In addition, the company can benefit from tax-deductible interest and thus lower tax burden. However, debt is not always excellent, and we should analyze whether the profitability of raising the debt is greater than the cost of leverage.
Overview of problems
Blaine Kitchenware was a mid-sized producer of small appliances primarily used in residential kitchens. By 2006, the company’s products consisted of a wide range of small kitchen appliances including deep fryers, griddles, toasters, ovens etc. Blaine had just fewer than 10% of the $2.3 billion U.S. market for small kitchen appliances.
During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue of $342
Group 7
Contents
Executive Summary 3
Overview of problems 3
Analysis on Capital Structure & Payout Policies of Blaine 3
1. Inappropriate current capital structure and payout policies 3
2. Advantages and disadvantages of large share repurchase proposal 4
a. Effects of share repurchase on assets, liabilities and equity on balance sheet 5
b. Effects of share repurchase on debt ratios and interest coverage ratio 5
c. Effects of share repurchase on Earnings Per Share and Return On Equity 5
d. Bonus question—effects on wacc 6
4. Effects of the proposed share repurchase on shareholders 6
Appendix 7
Executive Summary
The main problem faced by BKI is over liquidity and under leverage. The capital structure of Blaine is too conservative. The main source of funding for business comes from equity capital. It would not be rational for a public company to be funded only by equity, which caused the company’s Return on Equity much lower than the industry average. In the meantime, current payout policies make payout ratio go up, lowering efficiency of the firm. The company can solve these problems by issuing debt to repurchase its stock. Debt is a lower cost source of financing and allows a higher return to the. In addition, the company can benefit from tax-deductible interest and thus lower tax burden. However, debt is not always excellent, and we should analyze whether the profitability of raising the debt is greater than the cost of leverage.
Overview of problems
Blaine Kitchenware was a mid-sized producer of small appliances primarily used in residential kitchens. By 2006, the company’s products consisted of a wide range of small kitchen appliances including deep fryers, griddles, toasters, ovens etc. Blaine had just fewer than 10% of the $2.3 billion U.S. market for small kitchen appliances.
During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue of $342