You have been hired as a consultant to Victor Dubinski, the CEO of Blaine Kitchenware.

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timer Asked: Apr 22nd, 2017

Question description

  • Consider three specific share repurchase proposals:

    a.First Proposal

    i. Blaine will issue $50 million in new debt at an interest rate of 6.75%

    ii. Blaine will use $209 million of cash from its balance sheet

    iii. Blaine will use these two sources of cash to repurchase 14 million shares at $18.50/share.

    b.Second Proposal

    i. Blaine will issue $95 million in new debt at an interest of 6.875%

    ii. Blaine will use $209 million of cash from its balance sheet

    iii. Blaine will use the two sources of cash to repurchase 16 million shares at $19.00/share.

    c.Third Proposal

    i. Blaine will issue $156 million in new debt at 7.125%

    ii. Blaine will use $209 million of cash from its balance sheet

    iii. Blaine will use the two sources of cash to repurchase 18.5 million shares at $19.75/share.

    d.How does a share repurchase affect Blaine? Consider the impact on items including (but not limited to) Blaine’s EPS, ROE, interest coverage, debt ratio, debt rating, the family’s ownership interest (proportion of shares outstanding) and the company’s cost of capital (WACC).

    e.What is your recommendation for the good of the company based on your analysis of the share repurchase options? Should they stay with the status quo, or go with one of the recapitalization options?

    Blaine Kitchenware – Case Assignment MBA – Corporate Finance You have been hired as a consultant to Victor Dubinski, the CEO of Blaine Kitchenware. You are charged with putting together a written report with supporting numerical analysis that addresses the following items: 1. Is the current capital structure and payout policy for Blaine optimal? Explain and justify your conclusion. Use numbers whenever possible. 2. Should Blaine recommend a large share repurchase to the Board of Directors? What are the advantages and disadvantages of this action? Again, explain and justify your conclusions. Use numbers whenever possible. 3. Consider three specific share repurchase proposals: a. First Proposal i. Blaine will issue $50 million in new debt at an interest rate of 6.75% ii. Blaine will use $209 million of cash from its balance sheet iii. Blaine will use these two sources of cash to repurchase 14 million shares at $18.50/share. b. Second Proposal i. Blaine will issue $95 million in new debt at an interest of 6.875% ii. Blaine will use $209 million of cash from its balance sheet iii. Blaine will use the two sources of cash to repurchase 16 million shares at $19.00/share. c. Third Proposal i. Blaine will issue $156 million in new debt at 7.125% ii. Blaine will use $209 million of cash from its balance sheet iii. Blaine will use the two sources of cash to repurchase 18.5 million shares at $19.75/share. d. How does a share repurchase affect Blaine? Consider the impact on items including (but not limited to) Blaine’s EPS, ROE, interest coverage, debt ratio, debt rating, the family’s ownership interest (proportion of shares outstanding) and the company’s cost of capital (WACC). e. What is your recommendation for the good of the company based on your analysis of the share repurchase options? Should they stay with the status quo, or go with one of the recapitalization options?
    BLAINE KITCHENWARE Project: Analysis: Draft: Footer: Draft Historical Income Statement BLAINE KITCHENWARE Historical Income Statement Y Harvard Business School Publishing Harvard Business School Publishing BLAINE KITCHENWARE Historical Income Statement Case Exhibit 1 Operating Results: Revenue Less: Cost of Goods Sold Gross Profit Less: Selling, General & Administrative Operating Income Plus: Depreciation & Amortization EBITDA EBIT Plus: Other Income (expense) Earnings Before Tax Less: Taxes Net Income Dividends 2004 291.940 204.265 87.676 25.293 62.383 6.987 69.370 2005 307.964 220.234 87.731 27.049 60.682 8.213 68.895 2006 342.251 249.794 92.458 28.512 63.946 9.914 73.860 62.383 15.719 78.101 24.989 53.112 18.589 60.682 16.057 76.738 24.303 52.435 22.871 63.946 13.506 77.451 23.821 53.630 28.345 Margins: Revenue Growth Gross Margin EBIT Margin EBITDA Margin Effective Tax Rate (1) Net Income Margin Dividend payout ratio 3,2% 30,0% 21,4% 23,8% 32,0% 18,2% 35,0% 5,5% 28,5% 19,7% 22,4% 31,7% 17,0% 43,6% 11,1% 27,0% 18,7% 21,6% 30,8% 15,7% 52,9% (1) Blaine's future tax rate is assumed to revert to the statutory rate of 40%. Harvard Business School Publishing BLAINE KITCHENWARE Project: Analysis: Draft: Footer: Historical Balance Sheet BLAINE KITCHENWARE Historical Balance Sheet Y Harvard Business School Publishing Harvard Business School Publishing BLAINE KITCHENWARE Draft Historical Balance Sheet Case Exhibit 2 Assets: Cash & Cash Equivalents Marketable Securities Accounts Receivable Inventory Other Current Assets Total Current Assets 2004 67.391 218.403 40.709 47.262 2.586 376.351 2005 70.853 196.763 43.235 49.728 3.871 364.449 2006 66.557 164.309 48.780 54.874 5.157 339.678 Property, Plant & Equipment Goodwill Other Assets Total Assets 99.402 8.134 13.331 497.217 138.546 20.439 27.394 550.829 174.321 38.281 39.973 592.253 Liabilities & Shareholders' Equity: Accounts Payable Accrued Liabilities Taxes Payable Total Current Liabilities Other liabilities Deferred Taxes Total Liabilities Shareholders' Equity Total Liabilities & Shareholders' Equity 26.106 22.605 14.225 62.935 1.794 15.111 79.840 417.377 497.217 28.589 24.921 17.196 70.705 3.151 18.434 92.290 458.538 550.829 31.936 27.761 16.884 76.581 4.814 22.495 103.890 488.363 592.253 Note: Many items in BKI's historical balance sheets, e.g. Property, Plant & Equipment have been affected by the firm's acquisitions. Harvard Business School Publishing Exhibit 3 Selected Operating and Financial Data for Public Kitchenware Producers Revenue EBIT EBITDA Net income Cash & securities Net working capital* Net fixed assets Total assets Net debt (1) Total debt Book equity Market capitalization Enterprise value (MVIC) Equity beta Home & Hearth Design AutoTech Appliances $589.747 $18.080.000 106.763 2.505.200 119.190 3.055.200 $53.698 $1.416.012 $21.495 54.316 900.803 $976.613 $536.099 1.247.520 7.463.564 $9.247.183 XQL Corp. $4.313.300 721.297 796.497 $412.307 Bunkerhill, Inc. $3.671.100 566.099 610.399 $335.073 EasyLiving Systems $188.955 19.613 23.356 $13.173 $21.425 353.691 3.322.837 $3.697.952 $153.680 334.804 815.304 $1.303.788 $242.102 21.220 68.788 $332.110 ($64.800) 177.302 $94.919 $350.798 372.293 $475.377 $4.437.314 4.973.413 $3.283.000 $950.802 972.227 $2.109.400 $238.056 391.736 $804.400 776.427 $1.127.226 13.978.375 $18.415.689 5.290.145 $6.240.947 3.962.780 $4.200.836 418.749 $353.949 1,03 1,24 0,96 0,92 0,67 LTM Trading Multiples MVIC/Revenue MVIC/EBIT MVIC/EBITDA Market/Book equity 1,91x 10,56x 9,46x 1,63x 1,02x 7,35x 6,03x 4,26x 1,45x 8,65x 7,84x 2,51x 1,14x 7,42x 6,88x 4,93x 1,87x 18,05x 15,15x 4,41x Net Debt/Equity Net Debt/Enterprise Value 45,18% 31,12% 31,74% 24,10% 17,97% 15,23% 6,01% 5,67% -15,47% -18,31% * Net working capital excludes cash and securities (1) Net debt is total long term and short term debt less excess cash. Blaine Kitchenware $342.251 63.946 73.860 $53.630 $230.866 32.231 174.321 $592.253 ($230.866) $488.363 959.596 $728.730 0,56 2,13x 11,40x 9,87x 1,96x -24,06% -31,68% Exhibit 4 Contemporaneous Capital Market Data: April 21, 2007 Yields on US Treasury Securities Maturity 30 days 4,55% 60 days 4,73% 90 days 4,91% 1 year 4,90% 5 years 4,91% 10 years 5,02% 20 years 5,26% 30 years 5,10% Seasoned corporate bond yields Moody's Aaa 5,88% Aa 6,04% A 6,35% Baa 6,72% Ba 7,88% B 8,94% Default spread 0,86% 1,02% 1,33% 1,70% 2,86% 3,92%

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