3.

    The following proposal is being considered by the CEO: Blaine will use $209M of cash from its
new debt at an interest rate of 6.75% to repurchase 14M shares at a price of 18.50 per share. Ho
affect Blaine (consider EPS, ROE, interest coverage, debt ratios and cost of ca
Formula:
ROE = Net Income / Shareholder's equity
EPS = Net income / No of shares outstanding
Interst Coverage = EBIT / Interest Expense
Debt Ratio = Total Debt / Total Assets
Cost of Capital = CAPM to get the return on equity and then use WACC to find the cost of capital

Values considered:
We know that the Market capitalization is $959,596,000 and the Current value of Shares is $16.25 from the case
No of Shares Outstanding = Market Cap / Value of shares ---> 959,596,000/16.25 = 59,052,061 ( no of shares ou

Blain will use $209M of Cash from it B/S and take debt of $50M at 6.75% interest rate to repurchase 14M share
No of Shares Outstanding after buy back = 59,052,061 - 14,000,000 = 45,052,061
Interest Expense of Blaine = 50,000,000 * 0.0675 = 3,375,000
From Exhibit 3 we know that the EBIT is 63,946,000 so then the interest expense = 50,000,000 x 6.75% = 3,375,0
Hence Earnings Before Tax (EBT) = EBIT -Interest Expense =63,946,000-3,375,000 = 60,571,000
Finally we can get the Net Income by EBT - Tax rate of 30.8% = 60,571,000 - 30.8% = 41,915,132
To calculate Total debt we take Total liability in the Balance Sheet post leverage
Calculations

ROE = N.Income / Shareholders equity

ROE = 41,915,132 / 229,363,000 = 0.18 (OR) 18.27 %

EPS= Net income / No of shares outstanding

We know that EBIT is 63,946,000 - Interest Expense of 3,375,000 = 60,571,000 - Tax of 30.8% paid = 41,915,132
EPS= 41,915,132 / 45,052,061 = 0.93
Percentage change is EPS = 0.93-0.91/0.91 = 2.24%

Interest Coverage Ratio = EBIT / Interest Expense

From Exhibit 3 we know that the EBIT is 63,946,000 and interest expense = 50,000,000 x 6.75% = 3,375,000
Interest Coverage Ratio = 63,946,000 / 3,375,000 = 18.95 times

Debt Ratio = Total Debt / Total asset

Total Liabilities is 126,129,000
Total liabailities can be considered as Debt which includes additional borrowings of 50 Million
Total assets is $383,253,000 from Balance Sheet Post Leverage

Debt Ratio = 126,129,000 / 383,253,000 = 0.33 or 32.91%

Family Ownership Interest

62% of 59,052,061 before share buyback = 36,612,277
New no of share outstanding = 45,052,061
Therefore = 36,612,277 / 45,052,061 = 0.81 (or) 81%

Cost of Capital = CAPM to find Return on Equity and then use that in WACC to find the cost of capital

Data from the case (FY 2006)

Long term debt
Interest rate (rd)
Net shares outstanding
Current share price
Market Capatilisation (USD '000)
10 year yield on US treasuries (rf)
S&P 500 index return (rm)
beta of Blaine Kitchenware

Total Capital (V)

Weightage of Debt (D/V)
Weightage of Equity (E/V)

We calculate re using the CAPM:

re = rf + beta(rm - rf)
= 5.02% + 0.56(10.00% - 5.02%)
= 7.81%

WACC = (6.75% * 0.064)(1-30.8%) + (7.81% * 0.936)

= 0.30 + 7.31
WACC = 7.61%
Values
50,000,000
6.75%
45052000
16.25
732095000
5.02%
10.00%
0.56

782095000
0.064
0.936
 Share-Repurchase(With Leverage)
All amount in $000
Liabilities Amount Assets
Accounts Payable 31936 Cash & Equivalent
Accured Liabilities 27761 Marketable Security
Taxes Payable 16884 Accounts Receivable
Inventory
Total Current Liabilities 76581 Other Current Assets

Other Liabilities 4814 Total Current Asset

Deferred Taxes 22495
New Debt 50000 Plant, Property & Equip
Total Liabilities 153890 Goodwill
Other Asset
Shareholders Equity 229363

Total Liabilities + Total Equity 383253 Total Asset

Total Asset = Total Liabilities + Total Equity

383253 = 153890 + 229363
Amount
21866
0
48780
54874
5158

130678

174321
38281
39973

383253