Blaine Kitchenware Inc.

Written Case Analysis

Blaine Kitchenware was a kitchen appliance producer, initially a family owned business they had
later gone public and raised equity by offering their first IPO under Victor Dubinski in 1992. The
company had outsourced its production abroad and now with modest sales growth and a control
of just under 10 % of the market share in the appliance sector.
The current capital structure of the company as discussed with an investment banker was over-
liquid and under-levered which was not a very favorable position considering the lost investment
opportunities with a large amount of cash and securities in hand, and this also meant they were
paying dividends to shareholders on cash that was laying idle.
With the current option of making a large repurchase of stocks the company could make major
changes to the capital structure of the company but that will not improve the operational
problems which has restricted the growth to 3 % in 2007. The MM approach to capital theory
suggests that the capital structure of the firm is irrelevant to the valuation of the firm, rather the
market value of the firm is solely dependent on the operating profits.
Some of the setbacks that the company may face after buyback is to jeopardize their growth plan
through acquisitions, and by using the cash now the company may have to opt for more debt in
the future but the advantages can create value for the firm by improving critical ratios such as
ROE, EPS which are used to measure the growth of the company. The Debt to Equity ratio will
increase the financial risk but this will allow consolidation of ownership as the family members
will have their share increased from 62% to 81%.
Whereas, the MM theory may suggest the capital restructuring is merely window dressing it also
makes an assumption that there are zero taxes. In this case of repurchases where the company is
using debt will help create a tax shield of 0.342 dollars per share for the company which is
considerable even by paying extra for the share repurchase of 2.25 dollars per share. It may
appear that the company is paying more than what they are saving since the cost of repurchase is
greater than the tax shield but the extra payment should not be considered as a cost but more of a
dividend payment as a bonus for the shareholders.
Furthermore, to support the advantage of the tax shield and restructuring of their capital
structure, the pecking order theory suggests the cost of financing increases as companies use
sources of funding where the degree of asymmetric information is higher. Where public equity is
the least preferred and internal financing is the most favorable choice.
The choice of repurchasing stocks is a very good option for the company using cash and debt to
finance their purchase. The Enterprise value which measures the company’s total value will
increase with the change in capital structure of the company.