Blaine kitchenware has occupied the industry for a 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 the best for the family company. The following questions will address what decision is the optimal and why it is beneficial for BKI.
* Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
The main dilemma in the case is whether Blaine Kitchenware’s should choose to repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they must consider whether to partially ...view middle of the document...
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 family’s 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. We think that this could possibly be the best option for Blaine’s Kitchenware to make.
According to their current situation we do not think 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.
Regarding their payout policies, the management’s goal is to maximize the shareholder’s 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.
* Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move?
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...