Kitchenware Assignment
1. (10 points) Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
I believe that Blaine’s current capital structure and payout policies are not appropriate. In the current situation it seems to me that Blaine does not adequately use its funds. Blaine is heavily invested in equity with minimal debt in its history, which could be from a management viewpoint that less debt means less risk. Due to the large financial surplus, Blaine is suffering from poor leverage. Moving focus to payout policies, from 2004 to 2006 EPS decreased from 1.29 to .91. The drop could be a result in less than average ROE when compared to competitors. Secondly the decrease in EPS despite an increase in the payout ratio from 2004 to 2006 is from Blaine’s issuance of more shares with some of its acquisitions. Even though the payout ratio increased since the number of shares also increased the result was a decrease in EPS. The use of equity maximized to minimize debt is less risky but is hurting their shareholders. If Blaine were to use debt financing they could actually increase their market value in large part by being able to utilize tax breaks they don’t have being equity focused.
2. (15 points) Should Dubinski recommend a large share repurchase to the board? What are the primary advantages/disadvantages of such a move?
Dubinski should absolutely recommend a large share repurchase to the board. A large share repurchase could help correct the poor capital structure and payout policies. As I mentioned in question one, Blaine is not taking advantage of a possible tax shelter. A large repurchase of shares will lower the taxed income burden on the firm. Market trends also show that a repurchase of shares actually increase the price of the stock. This effect is from the outside investors observing that the firm is financially stable enough to buy back the equity. Dubinski can gain the boards confidence with the basic fact that a large
I believe that Blaine’s current capital structure and payout policies are not appropriate. In the current situation it seems to me that Blaine does not adequately use its funds. Blaine is heavily invested in equity with minimal debt in its history, which could be from a management viewpoint that less debt means less risk. Due to the large financial surplus, Blaine is suffering from poor leverage. Moving focus to payout policies, from 2004 to 2006 EPS decreased from 1.29 to .91. The drop could be a result in less than average ROE when compared to competitors. Secondly the decrease in EPS despite an increase in the payout ratio from 2004 to 2006 is from Blaine’s issuance of more shares with some of its acquisitions. Even though the payout ratio increased since the number of shares also increased the result was a decrease in EPS. The use of equity maximized to minimize debt is less risky but is hurting their shareholders. If Blaine were to use debt financing they could actually increase their market value in large part by being able to utilize tax breaks they don’t have being equity focused.
2. (15 points) Should Dubinski recommend a large share repurchase to the board? What are the primary advantages/disadvantages of such a move?
Dubinski should absolutely recommend a large share repurchase to the board. A large share repurchase could help correct the poor capital structure and payout policies. As I mentioned in question one, Blaine is not taking advantage of a possible tax shelter. A large repurchase of shares will lower the taxed income burden on the firm. Market trends also show that a repurchase of shares actually increase the price of the stock. This effect is from the outside investors observing that the firm is financially stable enough to buy back the equity. Dubinski can gain the boards confidence with the basic fact that a large