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Blaine Kitchenware is issuing stock to raise money for their business.

BKI plans
repurchase its own shares. This means BKI plans to invest into its own company. The company’s
main issue is the fact that it is over liquid and under-levered and whether to distribute cash to
shareholders by buying back shares or paying dividends. The answer is easy as this; BKI has to
spend money to make money. Lucky for them they have the money and have more than enough
to invest into their company. When BKI repurchase their shares they are sending the message
that their stock price is affordable. Only BKI will know how much the company is worth. This
leads to a decrease in the number of shares outstanding in the market. BKI is looking for
improvements in liquidity of shares and enhancement of the shareholder wealth
Profit earned by BKI can be used by rewarding shareholders in the form of dividends and
capital expenditures. In recent years the company’s largest uses of cash had been common
dividends. Dividends per share had risen only modestly during the years 2004, 2005 and 2006.
The average capital expenditures during the past three years were just over $10 million per year.
BKI would go into buy back because they have unused cash and their share valuation should be
higher. Because BKI has excess cash and not many other projects to invest into, it is better for
them just to reinvest in what they already have. Buyback of shares is mostly done at a
higher price than the current market price of the stock. So on numerous
occasions, BIK, by buying their own shares at a price higher than prevailing
market price, company signals to the market that its share valuation should
be higher.
From what we have gathered, there are many advantages of the
buying back of shares. Some advantages are increase confidence in
management, enhances share value, high share price, reduce takeover

psychological effect and excellent tool for financial reengineering. One of the main reasons why a company would buy back their shares is if they have excess amounts of cash. When deciding whether to repurchase shares or not. Each option will be looked at thoroughly in the following calculations. If a company believes their share price is undervalued. Another reason is that since dividends are always taxed at a higher rate than capital gains. companies often do a share buyback if they plan on leaving the country or if they want to close the company. we consider three of the following scenarios: 1. BKI should do an entire buyback of shares. companies will often prefer to do a buyback for their shareholders. 2. Option 1 .chances. increases ROE. Also. BKI should not do any type of buyback. BKI should only do a partial repurchase of shares. they will do a buy back in hopes of raising the share price. 3. rather than distribute dividends. There are many reasons why a company would do a buyback of shares.

630 / 59.25 = 14.86 ROE Calculation = Net Income ÷ Shareholder’s Equity ROE = 53.866 / 16.25 / 0.91 (Rounded) Price per share = $16.557 Marketable Securities = 164.630 Therefore EPS = Net Income ÷ Number of Shares = 53.207 .25 Price to earnings ratio = Market Price ÷ EPS = 16.052 = 0.91 = 17.866 Number of Shares bought = 230.363 = 11% Option 2 (In Millions) Total Cash & Cash Equivalents = 66.309 Total amount available for buyback = 230.(In Millions) Number of shares: 59.052 Net Income: 53.630 / 488.

845 = $ 0.92%.271 ÷ 44.845 Calculation of EPS = Earnings per share ÷ total number of shares The company could have invested in U.497 ROE = 42.630 – (4.92% x 230.S.230.497 = 16.94 x 17.Therefore the number of shares remaining = 59.866) = 53.S.866 ÷ 59.86 = $16.052 – 14.363 .271 EPS now equals: 42.359 = 42.79 Increase in value per share: 16.207 = 44.94 Now the expected market price of the share would be: Expected EPS x P/E ratio Expected Market Price = 0. This interest rate is calculated by averaging out all the yields on U.91 (per share) ROE: Net Income = 42.25 = $ 0. treasury securities provided in Exhibit 4 which equals 4.271 ÷ 257. treasury securities so now we will have to account for the loss in interest earnings had it invested in those securities.271 Shareholders Equity = 488.42% . This means net earnings now equals: 53.052 = $ 3.54 Money spent on buyback = 230.79 – 16.630 – 11.866 = $ 257.

128 .052 million shares.949 Less taxes = 23.052 million shares.439 million Total price of the shares to be repurchased = 22.75% of 157.75% = 10.121 – 257.588 Less interest @ 6.358 Revised EBIT = 52.639 Earnings before taxes = 41.92% = 11.612 million shares.497 Debt to be raised for buyback = 415.75% EPS: Interest to be paid = 6.439 million shares.624 @ 6. which equals 22. Debt to be raised: Number of shares to be repurchased = 22.497 = 157.Option 3 Blaine needs to repurchase 38% of 59.639 EBIT = 63.946 Less loss of cash and cash equivalants and market securities at 4. which would be 36.821 Net Income = 18.439 x $18.121 Less cash and cash equivalents = 257.50 = 415.624 = $ 10. This being said the remaining number of shares after buyback would now equal 62% of 59.

EPS = 18. the scenario fails to create value for the shareholders and will not be a great option for BKI.50 ROE = 18. . For option two. For option one with no buy back. in comparison with its peers. The complete buy back method involves BKI in taking on debt.04% We can safely say that the best option for BKI is to go for a complete buy back of their shares.25 – 8.497 = 7. the WACC will come down as cost of equity decreases.. Since.121 ÷ 59.029 Decrease in value per share = $ 16. debt is being raised. Since no debt is being raised. has a low marketbeta – better thing for the stock-holders to do will be to sell the stock and invest in alternates.86 = 8.49 x 17. Since the company.052 = $ 7.75 Price of shares to be bought back = $ 415. it might find favor with BKI.49 Expected market price = 0. all the cash & cash securities plus the market securities are used by the company to buy-back the shares. Family’s needs concerning the dividend amount/growth can be better met through the complete buy back method.75 = 7.612 = $ 0. Therefore BKI should go with the complete buy back method.128 ÷ 257.128 ÷ 36.

1 percent ownership. With these problems in Victor Dubinski mind. To explain this effect. First we will look at the effects it would have upon the family members that are in control and also large stake holders in the business. One biggest way that this buy back benefits the family is the weight of their shares would increase along with their ownership right. repurchasing shares was becoming more appealing. The other benefit of having this increase of control is that the shareholders would also have increased dividend claims since their share percentage increased. Since it is a family based owned business an option to buyback could send many . Blaine Kitchenware needed to do something to help increase their ROE and their earnings per share. This now means that the member would own 1000 shares of 9000. it could also resort to increasing the aesthetics of the company. it is vital to consider every party that will be affected from this outcome. One of the big main reasons is that Blaine Kitchenware is sitting on a large sum of money and not very sure how to reinvest it. which would result in a 11. it would mean that the member had ten percent ownership. With the combine shares of the family. With Blaine company sitting with below average ratio’s. With the consideration of a buy back the family members would be pressuring for reacquisition of the market float of shares. Before a decision like this is made. each family member would be benefitted by this transaction. As for the market float of investors that do not have control the buyback will have many different effects on. By eliminating a portion of the market float. So with a buy back its easy to see why all the family shareholders would be interested. to follow through with this transaction of repurchasing shares. if a member was to have 1000 shares of 10000. When the buyback occurs.When it comes to the final question there are many reasons why it would be beneficial for the Blaine Kitchenware Inc. Many people look at the growth of a company as a large indicator of success but there is much more than that. they own sixty two percent of the business. the company could buy back 1000 shares.

With the family getting more control and the shareholders getting a potential increase of control and payout.signals to the other shareholders. the shareholders of Blaine will be for the buy back because of the increase to their share value and their dividend payout. This signal could suggest that Blaine Kitchenware are either in some equity trouble that they need to use the buyback to help hide some of their ratios or also that they are worried about a takeover. This will help the company get back on balance and increase each of the received value of dividend payout to each shareholder. it may be a good idea for Dubinski to follow through with the idea. since the company has only taking on this form of debt twice in their history. With this decision it brings on large amounts of tax expense which can be seen as negative. In this case though it is more towards the goal of increasing their ratios and and investing some of the money that is held by their company. Regardless of this. Some of the shareholders may not be overly pleased with the fact that the company plans to take on unnecessary debt to help finance the buy back. . It is imperative that Blaine Kitchenware maintains it debt to equity so that none of their debt agreements will fault. Overall it is easy to see why both the family shareholders and the market float of shareholders would be interested in the partial buyback of shares of Blaine Kitchenware.