Do You Believe Blaines Current Capital Structure Finance Essay

Do You Believe Blaines Current Capital Structure Finance EssayDo you conceptualize Blaines current big(p) structure and payout policies ar appropriate? Why or why not? Blaines capital structure and dividend policy are not entirely appropriate from the point of view of a touchholder of the unfaltering. The reasons for that can be summed up as follows No leverage The optimum mix of debt and candor in the capital structure will maximize partholders return. Company should take on debt to acquire new firms and expand its ope proportionalityns.Low roe Attributed to Low leverage2006 ROE data clearly shows up that ROE of all the comparable firms are much higher than that of Blaine.Increasing Dividend payout ratioAs calculated in inquire no.3, the cost of equity of the firm is close to 9% whereas ROE is 11%. This is a good proposition for shareholders. This can be enhanced by acquiring other companies using cash balance that the club has.Decreasing EPSEven when EPS is constantly d ecreasing over the last three years, the policy of giving to a greater extent or less same amount in dividend may cost company in future.Way of financing of new acquisitionsBlaine Inc. should rather raise capital in debt rather than issuing new stocks to raise capital. This will ensure EPS constant and will be good for shareholders.Should Dubinski recommend a large share repurchase to Blaines board?What are the primary advantages and disadvantages of such a move?No, Dubinski should not recommend a large share repurchase to the board. The reason for that is although the firm is public listed, still a large percentage of share is owned by family itself. Therefore, buying back the shares is as good as unlisting the company. Secondly, there are growth avenues wherein the company may require cash. The company should, like last two years, go for acquisition. This will bring value to shareholders. Else, during the times of new acquisitions, company would have to raise capital from the mark et and due to flotation cost the cost of equity will be much higher.Consider the following share repurchase proposal Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing engage at the crop of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, BKIs earnings per share and ROE, its interest coverage and debt ratios, the familys ownership interest, and the companys cost of capital.Effect of Share BuybackParticularsValueRemarksEquity Capital_Pre Buyback ($)488,363,0002006, Exhibit 2Equity Capital_Post ($)279,363,000No. of Shares outstanding in front buyback59,052,000No. of shares bought back14,000,000 substance outstanding Shares45,052,000EPS_Old($)0.91EPS_New ($)1.19Percent dislodge in EPS31.08%P/E ratio17.86Market Price (S)21.30Percent change in Share price19.28%Debt_equity Book Value17.90%Debt_equity Market Value5.21%Debt interest rate 6.75%Interest to be paid ($)3375000Interest coverage ratio0.05ROE0.11ROE_new0.19Change in ROE74.52%Cost of Equity9.01%Cost of Debt6.25%Effective Tax rate40.00%Expected future tax rateD/V4.95%WACC8.75%WACC_Old9.01%Change in WACC-2.89%Equity beta Calculation for the FirmMarket CapEquity beta(Net)D/ENet DebtCash SecuritiesTotal DebtD/E(1)(2)(3)(4)=(1)x(3)(5)(6)=(4)+(5)(7)=(6)/(1)Home and Hearth Design776,4271.0345.18%350,79021,495372,28547.95%AutoTech Appliances13,978,3751.2431.74%4,436,736536,0994,972,83535.58%XQL Corp.5,290,1450.9617.97%950,63921,425972,06418.37%Bunkerhill Inc.3,962,7800.926.01%238,163153,680391,8439.89%Easyliving Systems418,7490.67-15.47%-64,780242,102177,32242.35%Blaine Kitchenware959,5960.56-24.06%-230,879230,866-130.00%Average25,386,0720.9010.23%25.69%Unlevered Beta0.78Beta_Blaine0.80Ownership Scenario For last 3 years and post share buyback2004200520062007 neat Shares41,309,00048,790,00059,052,00045,052,000Ownership of Founders descendants62%52%43%57%Assumption s UsedEffective Tax rate has been taken equal to 40%, same as for Blaine.As a member of Blaines controlling family, would you be in favor of this proposal? Would you be in favor of it as a non-family shareholder?As a family member of Blaine, the news of buyback has to be evaluated in both the ways.The Pros areConsolidating Control- This will increase the shareholding close to 57%.Return of Cash unnecessary to Shareholders-As of now in April, 2007, there are no any plans of buybacks. Therefore, keeping cash intact leads to opportunity cost of shareholders. This will add value for shareholders.An impressive defense against takeover- as the market is consolidating, it will be a wise decision to protect the company from hostile takeovers.The cons areEffect on expansionary plans- As cash will be used to buy back shares and the company wont be able to raise money from markets in the near future, opportunities of acquisitions will be marred. Even if, company will raise capital from equit y market, flotation cost will be high and so cost of equity will be comparatively high.Use of Leverage- the Company has been against the policy of taking debt. Taking debt of $50 million for share buyback will not go in line with the companys policy.