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Blaine Kitchenware Case Study Solution
Blaine Kitchenware Case Study Solution
Blaine Kitchenware has occupied the industry for over 80 years and
continues to gain control in the market it occupies. As the CEO of the
company, Mr. Dubinski is faced with the difficult decision of determining
what is best for the family company. The following questions will address
what decision is the optimal and why it is beneficial for BKI.
1) The main dilemma in the case is whether Blaine Kitchenwares should
choose to repurchase its own shares or not. If Blaines Kitchenware does
repurchase its shares, they must consider whether to partially repurchase
the market float or go for a complete buyback where Blaines family would
become the owner of all the remaining shares. They also have to consider
of the effect of the repurchase on various factors like the risks involved in
raising a debt especially when they are large, very conservative and debt
free. They should also consider things such their acquisition plans, their
earnings per share and their dividend per share, ownership structure,
capital structure and of course the reputation of the company in the
market after the buyback. With this in mind we can consider a few
situations and then decide what Blaine should do, keeping in mind the
perspective of both the existing shareholders' as well as Blaine's familys.
Since no debt is being raised, if all the cash & cash securities plus the
market securities are used for the buy-back, his family may like this
option. Their management will have increased stakes, this will reduce
their chance of being acquired and this will provide more dividends to
their remaining shareholders.
There is a big question facing Blaine and that is why would their existing
shareholders want to sell their equity back to the company? Another
scenario is to completely buy-back the market float. Although this will
involve the company raising a significant debt, this will also give them
complete control to the promoters. It is probable that their familys needs
concerning the dividend amount and growth can be better met through
this option and the policy can be set according to their expectations. The
return on equity will increase which will aid the family in better realizing
value for their stake. From the point of view of the shareholders, they are
getting a premium on the current market price if they go ahead with the
offer and since debt is being raised the WACC will come down. I believe,
this could possibly be the best option for Blaines Kitchenware to make.
According to their current situation, their current capital structure and
payout policies are appropriate. Blaine is currently over-liquid and underlevered and their shareholders are suffering from the effects. Since Blaine
Kitchenware is a public company with large portion of its shares held by
their family members, they have a financial surplus, which decreases the
efficiency of its leverage. In other words, Blaine does not fully utilize its
funds. Since they are totally equity financed, there is no tax shield. A
surplus of cash lowers the return on equity and increases the cost of
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capital; also large amount of cash may offer incentives to acquirer to and
also decrease the enterprise value of Blaine. Acquirers could pay way less
than they originally expect to buy out the firm.
Regarding their payout policies, the managements goal is to maximize
the shareholders value, rather than paying dividend. The management
should use the available cash and invest in attractive investments.
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. In summary, in order for Blaine to keep its current
payout policies, they must reduce numbers of outstanding shares
throughout share repurchasing.
2) Such a large move for the company can greatly affect a lot of aspects,
and different interests lie in different areas for shareholders and
management. When stock repurchases occurs it lowers the amount of
stocks within the company, and eventually within time the E.P.S. would
increase in future. This company is facing an unbalanced capital structure
and such a move of a share repurchase, with the help of both cash and
short/long term borrowing. Raising debt can have its advantage within
capital structure, replacing the equity within the firm can reduce WACC
and that can lead to a tax advantage. Covering the advantages and
disadvantages of the repurchase, we will recommend what Dubinski
should do.
Covering the advantages of share repurchase first, and focus on what
advantages Blaine can gain from repurchasing the shares. A first
advantage of a share repurchase can be the tax implications involved with
it, and the benefit that arises from it. The more a company is leveraged by
debt affects the capital structure, which in turn lowers the amount of
taxed income. This is one beneficial form of stock repurchase.
The second benefit arising from a stock repurchase is the increase in
earnings per share. If earnings were to remain stable, and the number of
shares decrease than the earnings per share will increase. When an
efficient market reacts to information such as this, the price of the stock
will increase because the price of the share increased.
When investors are alerted about a new stock repurchase the price of the
stock generally increases which is also beneficial for Blaine Kitchenware.
Advantages in stock repurchase also occur to the outside market, where it
alerts them on how healthy cash flows are within the firm. Float is also
decreased in the firm, where outside shareholders have less share of the
company. An increase in buying back the equity can be beneficial for any
company that has the power to do so.
Although there are several beneficial advantages to stock repurchasing,
their also is a few disadvantages that come with it. Announcement of the
share repurchase, and the actual repurchase have a big effect from the
timing of the events. Although stock prices might increase initially, they
might decrease once the actual stock repurchase is finalized.
Disadvantages in stock repurchasing are largely involved with timing, and
what the markets might think of the purchase. It can manipulate earnings
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and overstate them in a way that is not as good for the company.
Manipulating earnings can overstate the actual company value.
Stock repurchase can be incredibly beneficial, especially for a company
like BKI that has the power to perform a buyback. If company has healthy
cash-flows matched with a need to increase debt within the company, this
can be beneficial for BKI. Increasing earnings per share is important in
repurchasing shares but also the tax advantages (even if they might be
lower) they are still advantageous. If a firm has extra cash with healthy
cash flow and a reduction of tax and possibly an increase in firm value.
Dubinski should make a large share repurchase and BKI should recover
some its shares in hopes of gaining the advantages of tax, and a stronger
EPS. The company has the assets (cash) and can take the restructuring of
debt to take advantage of this share repurchase.
3) Calculations
EPS
EPS= EBIT/CSO
Repurchase of shares:
(50,000,000)
259 million in cash
3,375,000
50 million in new-debt bearing interest
To repurchase 14,000,000
Interest = 6.75%
=
ROE
ROE = Net Income
CSO
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ROE = 53,630/45,052
ROE = 1.19
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