Subject: Blaine Kitchenware Case
Introduction on Case Study:
Blaine Kitchenware Inc. (BKI) was a mid-sized appliance producer that sold most of its products for residential kitchen use. It got its start as Blaine Electrical Apparatus Apparatus Compan in !"#$. B #%%& the compan had e'panded and most of their products were small residential kitchen appliances. he controlled ust under !%* of their products market and was posting +er modest sales growth rates.he competition from mass manufacturing and cheap imported products had ,egun to hurt the compan. compan. ore ore recentl Blaine has ,een e'panding e'panding its ,usiness ,usiness into foreign markets which had definitel helped to keep them profita,le howe+er o+er &/* of their shipments were still made to customers in the 0.1. 2ithin the small kitchen appliance industr there are 3 maor segments food preparation appliances cooking appliances and ,e+erage-making appliances. he ,iggest of these 3 segments were clearl food preparation appliances and cooking appliances. Blaine had their feet in all 3 of these segments and were regarded , consumers as ,eing a compan that had a 4cult5 following for creating appliances that alwas made wholesome homemade meals. 6ictor 6ictor 7u,inski is the CE8 of the compan and one of the grandsons of one of the founders. 9e took on this role succeeding his uncle in !""#. he ke issue in this case are whether or not the compan should go forward with a large scale ,u,ack of compan stocks. stocks. 2e will go through the the ad+antages and disad+antages disad+antages of making a maor mo+e like this and gi+e our recommendation of whether or not the should mo+e forward with it. 2e will look at their compan:s capital structure paout polic and the different +iews and repercussions that come from such a mo+e ,oth internall and e'ternall. here here are man different +aria,les to look at when deciding whether or not to make a mo+e such as this and we will ,reak them all down in this write-up.
Questions for Blaine Kitchenware, Inc. Question 1. Current Capital Structure and Payout Policy
Blaine Kitchenware Inc. has ,een one of the most sta,le companies within their industr. industr. 2ith constantl paing out di+idends and growing at a modest rate of #* e+er ear Blaine Kitchenware has ,ecome a compan man look to in+est in. Blaine Kitchenware compounds an a+erage earl return of around !!* though this did ,eat the 1;< /%% of !%* growth it was significantl worse than its industr peers which had a return of !&*. In the past two ears the compan has also reduced the amount of cash and securities on hand from =#>& to =#3! million most of which had gone to cash considerations paid out in ac?uisition and di+idends. In doing so the are issuing more and more stock to finance these ac?uisitions. he paout polic has ,ecome skewed as a result although cash spent on di+idends has increased , roughl =!%%%% from =!>%%% to =#>%%% the di+idends per share ha+e onl increased , =%.%3 =%.@/ per share to =%.@> per share thus not creating a large shareholder return on e?uit. enerall enerall ac?uiring more and more companies co mpanies is not the most profita,le ,usiness strateg. Blaine Kitchenware Kitchenware could ha+e essentiall ,ought something at market +alue and if that compan does not perform well then ou ha+e taken on a proect with low or e+en a negati+e net present +alue.
he goal of an pu,lic compan and the Board of 7irectors should ,e first and foremost to increase earnings per share lowering costs and increase the +alue of the firm through positi+e net present +alue proects. Blaine Kitchenware Inc. has an o,ligation to increase shareholder wealth most of the time done , increasing the profita,ilit of their own compan. Blaine Kitchenware has a capital structure that incurs no de,t and is thus one hundred percent financed , e?uit making it +er inefficient. As a result the are not catering to the o,ligation of increasing shareholder wealth and growth of the compan. his shows that Blaine Kitchenware has a +er inappropriate capital structure and paout polic. B ,eing unle+ered and not including an de,t the firm has raised their weighted a+erage cost of capital. his makes it more e'pensi+e to go through with proects and does not allow for a larger return on in+estment. B including de,t into the capital structure Blaine Kitchenware could take ad+antage of an interest ta' shield. his would lower weighted a+erage cost of capital which would produce more proects with a positi+e net present +alue. B taking on more of these proects Blaine Kitchenware would then raise the +alue of the compan and increase shareholder wealth.
Question . Should !ubins"i reco##end a lar$e share repurchase to Blaine%s board&
A mo+e like this will o,+iousl ha+e a great affect on man aspects of the compan. 2hen a compan repurchases stocks it will increase its E<1 as e?uit lowers the total num,er of stocks that are within the compan increase in +alue. here are also ta' ad+antages that the compan would see from the reduction in 2ACC. his comes from the raise of de,t from ,oth short and long term ,orrowing to co+er the cost of this repurchase of stocks. I 7u,inski should recommend a large share repurchase to the Blaine ,oard. here are man ad+antages that come with the repurchase of stocks. he first is the increase in earnings per share. If their earnings indeed sta sta,le and the total num,er of stocks is reduced the earnings per share will o,+iousl increase. his will lead to the price of the stock increasing ,ecause of the increase in price per share. he second ad+antage in+ol+es the ta' implications that come with a share repurchase. he capital structure of a compan is affected , how much a compan is le+eraged , de,t. his change in the capital structure will lower the ta'a,le income for the compan. he third ,enefit of stock repurchase is that the stock price will increase most of the time. 2hen the in+estors in the compan hear a,out the repurchase of stocks the stock price will go up which is o,+iousl ,eneficial for the compan. his repurchase of stocks also affects the num,er of stocks that outside shareholder ha+e therefore decreasing float in the firm. In the outside market it is also ,eneficial for the compan as it alerts the outside world that cash flows are ro,ust. here are also howe+er some disad+antages that come with a compan repurchasing stock. 2hen the repurchase is announced the stock price ma increase ,ut when the repurchase actuall happens this increase ma ,e short li+ed. Earnings can also ,e o+erstated which will ha+e an ad+erse affect on the compan as the compan:s +alue ma also ,ecome o+erstated. In conclusion the repurchase of stocks can ,e greatl ,eneficial for companies that are in the right position to do so. I ,elie+e that 7u,inski should take ad+antage of this stock repurchase as the compan is in the position to do so and we ,elie+e that although there are disad+antages we ,elie+e the ad+antages greatl outweigh them.
Question '. (hat is the )inancial I#pact of *a"in$ on !ebt&
Consider the following repurchase proposal Blaine will use =#%" million of cash from its ,alance sheet and =/% million in new de,t at a rate of &.$/* to repurchase !@ million shares at a
price of =!>./% per share. or the following calculations we assumed no change from #%%& financial results other than the proposal to take on =/% million in new de,t. Depurchase of 1hares =#%" illion - Cash =/% illion - 7e,t Interest of &.$/* (=3.3$/ illion) F /3.3$/ illion Current 1hares 8utstanding /"%/#%%%-!@%%%%%% Current 1hares 8utstanding after ,u,ack @/%/#%%% Calculating earnings per share of Blaine Kitchenware re?uires that we su,tract the interest e'pense from the new de,t from BlaineGs EB. 2e then take use the companGs ta' rate from #%%& to calculate the new net income. Based on these calculations shareholders would see a =.#3 increase in earnings per share. his is a #/* impro+ement in earnings per share. EBI =&3"@&%%% - =33$/%%% (Interest a' 1hield) &$$./% Het Income =/!#">3##./% E<1 F =/!#">3##./% @/%/#%%% +PS -1.1 per share Change in E<1 =!.!@ - =%."! =%."! #/.#$* •
Het Income = /!#">3##./% 1hareholders E?uit =@3>3&3%%%.%% /0+:
11.2
Interest Co+erage Datio &3"@&%%% 33$/%%% Interest Co3era$e /atio: 14.56
otal 7e,t =/%%%%%%%.%% otal Assets =/"##/3%%%.%% !ebt /atio: 4.542
2ACC (>33@&#%%%>33@&#%%%) J !! (/%%%%%%%>33@&#%%%) J &.$/ J (!-.3%$/) (7CC 18.92 A stock ,u,ack followed , taking on =/%%%%%%% in new de,t would ha+e a positi+e impact on D8E and the the companGs cost of capital. 2hile their de,t ratio would increase from !>* to #/* this still a safe amount of de,t for a compan to ha+e. Additionall , looking at the
companGs interest co+erage ratio we can see that the compan generates almost !" times the amount of interest the need to co+er the new interest e'penses the will ,e incurring. he famil will now own >!* of the firm instead of the &#* the had ,efore ,ased on the e'pected size of the share ,u,ack. his means that Blaine Kitchenware can get stronger financial results while still ha+ing a reasona,le le+el of de,t. inancial results could ,e impro+ed further with more le+erage if the owners so chose.
Question : ow will Shareholders ;iew a Stoc" Buybac"&
Blaine Kitchenware has two distinct tpes of stockholders. amil mem,ers hold &#* of Blaine KitchenwareGs stock while the remaining 3>* is held , shareholders with no connection to the firm. amil mem,ers would most likel +iew the stock ,u,ack as a positi+e mo+e as this would gi+e them more control o+er the firm assuming the held onto their shares. ore centralized control of the firm would allow for more fle'i,ilit in setting future strateg. A stock ,u,ack would also ha+e ad+antages for the non-famil shareholders. 1hareholders who are disgruntled with BlaineGs underperformance compared to similar companies in the industr would take the opportunit to sell ,ack their shares while the remaining shareholders would ,enefit from the stock price appreciation. Companies tpicall onl ,u ,ack stock when it is under+alued which could signal to the market that Blaine Kitchenware is optimistic a,out its future growth. After the stock ,u,ack the remaining shareholders would see an appreciation in Blaine KitchenwareGs stock +alue due to the +alue of the firm ,eing split ,etween fewer remaining shares. Additionall a stock ,u,ack would result in capital appreciation which is ta'ed less hea+il than di+idends. Key
After analzing the capital structure paout polic and impact of a large scale stock repurchase on the compan Blaine Kitchenware Inc. a couple of ke ,usiness lessons can ,e learned from this case stud. As pre+iousl mentioned a,o+e the impact of decisions on shareholders is crucial. 0ltimatel a shareholder ma'imizing compan should aim to align its ,usiness decisions to meet the incenti+es of its shareholders. In this case stud it is e+ident that Blaine Kitchenware Inc. was not acting in the shareholdersG ,est interest initiall when making ke ,usiness decisions. his lesson ,rings us to the ne't takeawa the importance of capital structure on ,oth a compan and its shareholders. he ,enefits of de,t in the capital structure particularl in this case cannot ,e ignored. hat ,eing said there is no ke optimal capital structure for an one compan. In this case Blaine Kitchenware Inc. has an opportunit to increase the +alue of the firm through the use of le+erage. he capital structure a com,ination of de,t and e?uit must ,e tailored to and aligned with the incenti+es of ,oth the shareholders and the compan as a whole.
