Blaine Kitchenware Case Study

Blaine Kitchenware has occupied the industry for over 80 years and continues to gain
control in the market it occupies. As the CEO of the company, Mr. Dubinski is faced with
the difficult decision of determining what is best for the family company. The following
questions will address what decision is the optimal and why it is beneficial for BKI.

Ans. 1) The main dilemma in the case is whether Blaine Kitchenwares should choose to
repurchase its own shares or not. If Blaines Kitchenware does repurchase its shares,
they must consider whether to partially repurchase the market float or go for a
complete buyback where Blaines family would become the owner of all the remaining
shares. They also have to consider of the effect of the repurchase on various factors like
the risks involved in raising a debt especially when they are large, very conservative
and debt free. They should also consider things such their acquisition plans, their
earnings per share and their dividend per share, ownership structure, capital structure
and of course the reputation of the company in the market after the buyback. With this
in mind we can consider a few situations and then decide what Blaine should do,
keeping in mind the perspective of both the existing shareholders' as well as Blaine's
familys.
Since no debt is being raised, if all the cash & cash securities plus the market securities
are used for the buy-back, his family may like this option. Their management will have
increased stakes, this will reduce their chance of being acquired and this will provide
more dividends to their remaining shareholders.
There is a big question facing Blaine and that is why would their existing shareholders
want to sell their equity back to the company? Another scenario is to completely buy-
back the market float. Although this will involve the company raising a significant debt,
this will also give them complete control to the promoters. It is probable that their
familys needs concerning the dividend amount and growth can be better met through
this option and the policy can be set according to their expectations. The return on
equity will increase which will aid the family in better realizing value for their stake.
From the point of view of the shareholders, they are getting a premium on the current
market price if they go ahead with the offer and since debt is being raised the WACC
will come down. I believe, this could possibly be the best option for Blaines
Kitchenware to make.
According to their current situation, their current capital structure and payout policies
are appropriate. Blaine is currently over-liquid and under-levered and their
shareholders are suffering from the effects. Since Blaine Kitchenware is a public
company with large portion of its shares held by their family members, they have a
financial surplus, which decreases the efficiency of its leverage. In other words, Blaine
does not fully utilize its funds. Since they are totally equity financed, there is no tax
shield. A surplus of cash lowers the return on equity and increases the cost of capital;
also large amount of cash may offer incentives to acquirer to and also decrease the
enterprise value of Blaine. Acquirers could pay way less than they originally expect to
buy out the firm.

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Regarding their payout policies, the managements goal is to maximize the
shareholders value, rather than paying dividend. The management should use the
available cash and invest in attractive investments. Although investors take dividend as
an indicator for a company to succeed, they also expect dividend will be paid
continuously at either stable or growing rate. In summary, in order for Blaine to keep its
current payout policies, they must reduce numbers of outstanding shares throughout
share repurchasing.

Ans. 2) Such a large move for the company can greatly affect a lot of aspects, and
different interests lie in different areas for shareholders and management. When stock
repurchases occurs it lowers the amount of stocks within the company, and eventually
within time the E.P.S. would increase in future. This company is facing an unbalanced
capital structure and such a move of a share repurchase, with the help of both cash and
short/long term borrowing. Raising debt can have its advantage within capital
structure, replacing the equity within the firm can reduce WACC and that can lead to a
tax advantage. Covering the advantages and disadvantages of the repurchase, we will
recommend what Dubinski should do.
Covering the advantages of share repurchase first, and focus on what advantages Blaine
can gain from repurchasing the shares. A first advantage of a share repurchase can be
the tax implications involved with it, and the benefit that arises from it. The more a
company is leveraged by debt affects the capital structure, which in turn lowers the
amount of taxed income. This is one beneficial form of stock repurchase.
The second benefit arising from a stock repurchase is the increase in earnings per share.
If earnings were to remain stable, and the number of shares decrease than the earnings
per share will increase. When an efficient market reacts to information such as this, the
price of the stock will increase because the price of the share increased.
When investors are alerted about a new stock repurchase the price of the stock
generally increases which is also beneficial for Blaine Kitchenware. Advantages in stock
repurchase also occur to the outside market, where it alerts them on how healthy cash
flows are within the firm. Float is also decreased in the firm, where outside
shareholders have less share of the company. An increase in buying back the equity can
be beneficial for any company that has the power to do so.
Although there are several beneficial advantages to stock repurchasing, their also is a
few disadvantages that come with it. Announcement of the share repurchase, and the
actual repurchase have a big effect from the timing of the events. Although stock prices
might increase initially, they might decrease once the actual stock repurchase is
finalized. Disadvantages in stock repurchasing are largely involved with timing, and
what the markets might think of the purchase. It can manipulate earnings and overstate
them in a way that is not as good for the company. Manipulating earnings can overstate
the actual company value.
Stock repurchase can be incredibly beneficial, especially for a company like BKI that has
the power to perform a buyback. If company has healthy cash-flows matched with a
need to increase debt within the company, this can be beneficial for BKI. Increasing
earnings per share, is important in repurchasing shares but also the tax advantages
(even if they might be lower) they are still advantageous. If a firm has extra cash, with a
healthy cash flow and a reduction of tax and possibly an increase in firm value. Dubinski
should make a large share repurchase, and BKI should recover some its shares in hopes

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of gaining the advantages of tax, and a stronger EPS. The company has the assets (cash)
and can take the restructuring of debt to take advantage of this share repurchase.

Ans. 3) Calculations

EPS

EPS= EBIT/CSO

Repurchase of shares: Interest = 6.75%(50,000,000)

259 million in cash = 3,375,000
50 million in new-debt bearing interest
To repurchase 14,000,000

CSO = 59,052,000 - 14,000,000

CSO = 45,052,000

EBIT = 63,946,000 - 3,375,000

EBIT = 60,571,000

EPS = 60,571,000/ 45,052,000

EPS = 1.34

Change in EPS = 1.34 - 0.91

0.91
Change in EPS = 0.4725
= 47.25%

ROE

ROE = Net Income

CSO
ROE = 53,630/45,052
ROE = 1.19

Interest Coverage Ratio

Interest Coverage = EBIT/Interest Expense

Interest Coverage = 63,946,000/3,375,000
Interest Coverage = 18.95

Debt Ratio

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 Debt Ratio = Total Debt/Total Assets
Debt Ratio = 103 890 000/592 253 000
Debt Ratio = 0.1753

Family's Ownership Interest

62%(59,052,000 CSO)
= 36,612,000 shares
After repurchase of 14,000,000 shares

36,612,000/45,052,000
= 81.27%

With the calculations made we can see that not only can BKI afford torepurchase their
shares, but they will benefit from it. After calculating EPS therewould be a 47.25%
increase in the earnings per share afterrecapitalization. Another positive number
would be the 1.19 ROE, this numbershows that after the shares are repurchased that
there will be a positive return onequity. This number means they will turn a 119%
return on their equity after theshares are repurchased. Interest Coverage and the debt
ratio is anotherinteresting number. With the 18.95:1 ratio for interest income, and a
0.1754 debtratio, we see that BKI has a large amount of assets built up and will be
easilyable to afford the price of buying back these shares. This was one of the main
concerns, where they did not want to borrow money and potentially have a large
interest expense. As for the family's ownership interest, under the new proposal,they
would now own 81.27% of the company, giving them even more power than they would
have before. All of these calculations indicate that it would be greatlybeneficial to BKI
to repurchase their shares, where they can afford it and they willbenefit from it in the
long run.

Ans. 4) When a company is owned and maintained by a family that maintains it in a

strong family setting, it is important for them to maintain a certain percentage of
ownership. Eliminating external owners is important in gaining a better advantage for
the company, and in this instance the family Is looking to gain a larger ownership of the
company. The proposal would have to examine a number of factors, and some main
questions were asked on would it sap financial strength, or prevent the company from
making future acquisitions. Before examining the perspective of the family, and the
shareholder it is important to examine what an external financial party would insists on
behalf of a structured financial argument. A company with a healthy cash flow, matched
with a stable Net income can be a candidate for a stock repurchase. It is important to
examine the current debt obligations within the company, which are far less weighted
compared to Liabilities and Shareholders equity. The firms choice will ultimately lie on
BKIs financial perspective and needs on liquidity, capital structure, dividend policy, and
ownership structure.
As a member of the family I would be in favor for the stock repurchase for a number of
reasons. Members of the family were welcoming the idea of the possible effects of the
share repurchase, one main attraction of the repurchase would be the fact that

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ownership percentage would rise. This attraction is key to the family who maintain this
more family company, and a larger ownership in the company would allow them to own
more of it. Looking back on the history of the company, it is important to realize the
intangible effect the company has, and how advantageous it would be for them to have a
buyback. It would also give the board more flexibility in setting future dividends per
share, and give them more control of the company. As a member of the family I would
want the share repurchase because of the amount of control I would obtain, along with
the knowledge of my company having healthy cash flows. Although I would approve of
the share repurchase I would be skeptical about the debt factor within the repurchase,
the interest rate could be detrimental to the company and the interest payments could
incur more cost than benefit. It is also the third time since its inception, that the
company seeked debt financing which proved to be a large decision for the company. As
a member of the family I would approve of the repurchase, and there are no new trends
that indicate that the company will see future bad financial performance.
As a shareholder of the company you could be reluctant to receive a payment from the
buyback at market price, or you can be a shareholder who retains their shares. It is
beneficial in both cases; both shareholders who continue to own shares will see a rise in
EPS in shares after the repurchase which will benefit the shareholders. The
shareholders could see a significant rise for a short time, however it is important to
realize the amount of control they will lose when the family gains more control.
Although stock price might increase for a short period of time, the ownership
percentage can decrease which is detrimental to shareholders. Shareholders should
accept the proposal cause it can increase the companys value, and stocks which can
increase the value of selling the stocks which is beneficial for shareholders.
A stock repurchase for any company is based on timing, and certain financial and non
financial factors need to be met in order for the purchase to realize any benefit. BKI has
a strong and healthy cash flow, matched with an optimal need for debt restructuring
that could benefit the company. The benefits that are realized from this repurchase can
be very beneficial for BKI, and because of the financial position it is in, along with a
family favoring of the repurchase BKI should perform the repurchase. In all, the short
and long term benefits arising from the stock repurchase greatly outweigh the costs of
not performing any capital restructuring.

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