Blaine Kitchenware Case Submission

Group Member Details

Group 11 Name A.V.B. AjaySantosh Arijit Das Bappa Shona Baroi Bhagat Ankur Vijayku

Reg No. PGDM/0054/50 PGDM/0074/50 PGDM/0092/50 PGDM/0!05/50

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Discussion Questions and Solutions

Is Blaines capital structure appropriate? Give reasons.

No, we donot believe BKI's current capital structure and payout policies are the moste appropriate. Except two instances in their entire history, their firm structure has primarily invested in equity without incurrin any debt. Extendin shares too much has its own side effects in the lon run. !lthou h it is a ri ht consideration that less debt would mean less ris" or not, at the same time, they are not maximi#in the value of their firm completely by stayin away from debt financin . It is true that ris" will increase as debt increases, debt financin lowers the cost of capital primarily throu h tax reductions. $ith such conservative strate y, the firm will never reach its full potential, and in return this affects both their shareholders and payout policies as has already been expressed in the case where returns on sahreholders equity have been below industry avera e. ! such payout ration rises while E%& falls.'rom ())* to ())+ there payout ratio has risen from ,-. to -(./. while the earnin s per share dropped from 0.(/ to ./0. 1his is directly due to the much lar er number of their shares outstandin compared to their net income.1he avera e shares outstandin rew over 02 thousand shares. 1his results in creatin a ne ative ima e of the company amon st investors as a low payin investment while at the same time, lar e amounts of cash also escapes in payin out the increased common dividends. BKI's strictly conservative stance in financin their firm has led to minimi#ation of their shareholders earnin s and a sequentially increasin payout ratio. 0)) percent equity approach may be the safest idea, but that is not sufficient enou h in the lon run. 1o be competitive the company has to ta"e advanta e of the tax shield and the reduction of overall taxes possible throu h debt financin . 3espite bein ris"ier, some percenta e of debt financin leads to an optimal financial and so, a mixture of both the financin options should be accepted. &ince Blaine Kitchenware follows only equity financin structure, we believe that their capital structure and pay out policy is not the most appropriate for the firm.

Should the CEO (Victor Dubinsk ! reco""end a lar#e share re$purchase to the Board o% Directors? &hat' in our opinion' are the advanta#es and disadvanta#es o% this option?
3ubins"i should be recommendin a lar e repurchasin of shares to Blaine4s board. Blaine4s Kitchenware4s Business is over liquid and under levered. 1he 0//* I%5 ave Blaine's founder's family +(. of the business. Ever since BKI has been involved in many acquisitions of small independent manufactures to stren then their differentiation into previously wea"er se ments. But as a consequence of these new acquisitions shareholders value had ot increasin ly diluted as BKI stoc" had been used partly with cash for these purchases. 6esult7 earnin s per share fell si nificantly due to these dilutive acquisitions, and return to shareholders were below avera e. Blaine needs to reali#e that at times it is important to acquire levera e and buy bac" stoc". !s the shares outstandin amplified, their payout ratio reachd more than -). . 8ence it is very important that Blaine4s overturns this dilution shares and put a stop to the trend in their payout ratio as it is unsustainable. 1he primary advantage to repurchasin of stoc" is that stoc" holders that remain will have a hi her owner percenta e,since the case mentions that the family members aren't li"ely to sell their stoc"s, and therefore the payout ratio can decrease and E%& can increase.

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1he possible disadvantage with the repurchase of stoc" is that 3ubin"si4s timin could be bad as their stoc" price was not far off its all time hi h and so a si nificant amount of liquidity will be loc"ed. !lthou h this can be seen as a disadvanta e for some other competin company, BKI has an unique point that this all time hi h stoc" price really is not that hi h compared to its competitors performances.

Consider the %ollo(in# share re$purchase sche"e ) use *+,- "illion o% available cash alon# (ith *., "illion o% /.0.1 debt (pa able annuall ! to repurchase 23 "illion shares 4 *25.., per share. 6ake a detailed assess"ent o% this proposal' coverin# inter alia' Blaines E7S' 8OI' interest covera#e and debt ratio' cost o% capital' and the %a"il s o(nership interest.
Blaine4s return to shareholders is well below the avera e amon st its competitors 9 industry median of (-./. return on equity, compared to BKI's 00.. 8owever Blaine had achieved an EBI13! amon the stron est in its peer roup which shows that the issue does not lie in profitability. 1he issue at hand is the dilution of common stoc", which has come at the cost of Blaine4s acquisition strate y employed. 1herefore, repurchase of 0* million shares at the price of :0;.(-<stoc" usin :()/ million cash from balance sheet and :-) million in debt offers the followin benefits7 o Earnin s per share of :0.0/ 9 a 30.8 increase o 6eturn on equity of (,.*. = a !!".# increase o Interest covera e 9 0;./ 9 hi h value shows how little debt has been levera ed by BKI. o 3ebt ratio 9 ).);* =>ac" of levera in as the company can easily mana e this debt. o 'amily ownership interest 9 family ownership would increase assuming they don't sell. Calculations$ E%& . @han e in E%& 65E . @han e in 65E Interest @overa e 3ebt 6atio 'amily 5wnership Interest -,,+,)<*-,)-( ? :0.0/ 7 A0.0/=)./0B<)./0 ? ,).;. -,,+,)<A*;;,,+,=(-/,)))B ? (,.*. 7 A(,.*=00B<00 ? 00(.2. +,,/*+,)))<A).)+2- x -),))),)))B ? 0;./ -),)))<-/(,(-, ? ).);* ,+,+0(,)))<*-,)-(,)))? ;0.(2.

&ould the share$holders$ %a"il and non$%a"il ) approve this proposal?

%amily Shareholders7 Cembers of the family would be welcomin the idea of the share repurchase,as one main attraction of the repurchase would be the fact that ownership percenta e would rise. !s the case already mentions, the oweners consider the business a part of their family. 8ence a lar er ownership in the company would allow them to own more of it. 6epurchase will also ive the board more flexibility in settin future dividends per share, and as such ive them more control of the $" P a g #

company. Cembers of the family would want repurchase because of the amount of control they would obtain, alon with the "nowled e of the company havin healthy cash flows. 8owever this action wouldn4t immediately raise the overall value of these shares. It's because the increase in percenta e ownership would be offset by the decrease in owner4s equity due to increased liabilities. It would increase the value of the firm and of its shares throu h the tax shield associated with interest payments and havin debt. Interest payments are tax deductible unli"e dividend payments and as such the cash flow from Blaine4s assets A@''!B would increase as a result of replacin some of these dividend payments with interest payments, and due to the increase in the cash flows the overall value and share price of the company would also be reater. &on'(amily Shareholders7 &hareholders who continue to own shares will see a rise in E%& in shares after the repurchase for a short time. 8owever it is also important to reali#e the amount of control they will lose when the family ains more control. 1hou h stoc" price mi ht increase for a short period of time, their ownership percenta e can decrease which is detrimental to shareholders. But considerin all situations shareholders should accept the proposal cause it can increase the companies value, and stoc"s which can increase the value of sellin the stoc"s which is beneficial for shareholders. &o only those shareholders who want to remain as owners of the company would disapprove of it.

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