Blaine Kitchenware, Inc.: Optimal Capital Structure
For this case study you will take on the role of the investment banker introduced at the beginning of the case study. A week following your first meeting with Mr. Dubinski, he has called to request your assistance with the analysis of a stock repurchase. He has operational experience, but little financial management experience (he does not have any debt on his balance sheet!). As a result, he needs your help convincing his board of directors that the stock repurchase is a good idea. The board is more financially conservative than Mr. Dubinski. Mr. Dubinski wants you to evaluate a scenario where Blaine Kitchenware, Inc. (BKI) will repurchase 14 million shares at $18.50 per share. To do so, BKI will borrow $50 million at an interest rate of 6.75% (this is your stake in the deal because your bank will make the loan). Consider the following questions that are likely to be raised regarding the analysis: What effect does the proposal have on the balance sheet?
How is operating performance impacted? How are earnings per share and ROE impacted? How is leverage affected? How is interest coverage affected? What is the expected cost of financial distress? How is the cost of capital impacted? What happens to the family control of the business?
For this assignment you should write a memo to the board of directors. None of these directors are well versed in finance and all are skeptical of using debt. Space dedicated to explaining leverage concepts in layperson terms and the calculations involved will prove to be very relevant and well received. Board members are also looking for advanced analysis with evidence of critical thinking, particularly as it regards optimal capital structure. They always appreciate well written memos that make appropriate use of correct grammar and spelling. They are also very busy running their own corporations, so memos written in a concise manner are better received. However, as stated in Keys...
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