An English-language PDF of this Brief Case in an academic course pack will allow the students with the opportunity to buy an audio form as well. The owner of a growing and an expanding business of kitchen tools is considering to re-buy equity in reaction to an uncalled for acquisition. The company needs to find out the ideal debt capability and capital structure, and therefore must approximate the resultant change in the company’s value and stock price. Focus is also maintained on the importance of interest tax shields.
Calculations of Repurchase Proposal
Remaining Shares, Net Income, Revised Equity, EPS, ROE, Interest Coverage Ratio, Debt to Equity Ratio
Do you believe Blaine’scurrent capital structure and payout policies are appropriate? Why or why not?
Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move?
Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, BKI’s earnings per share and ROE, its interest coverage and debt ratios, the family’s ownership interest, and the company’s cost of capital.
As a member of Blaine’s controlling family, would you be in favor of this proposal? Would you be in favor of it as a non-family shareholder?
How does the proposal in question 3 differ from a special dividend of $4.39 per share?
Suppose that Mr. Dubinsky has obtained from Blaine’s banker the quotes below for default spreads over 10 year Treasury bonds [note that these differ from the more general bond yields in case Exhibit 4]. What do these quotes imply about Blaine’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure? Based on these calculations, how many shares should Blaine repurchase and at what price?