Blaine Kitchenware Case Write-Up
Based on available information of BKI, we believe its current capital structure and payout policy are not quite appropriate. First of all, the company is under-levered and over-liquid when it comes to its capital structure. This company in fact issued no debt in 2006. This may result from its conservative management strategies and the fear of risk involved in the process of debt raising. And since the company is totally equity financed, it did not enjoy the benefit of tax shield, which would actually increase the company’s value. The cash holding of the company is also problematic. This reveals that they did not make the best of their available fund. And excess cash holding in turn affected the company’s return on equity and increase its cost of capital. And we do see that its return on equity is only 11% in 2006, way below the industry’s average, which amounts to 25.9%. Moreover, the cash holding surplus may result in capital misallocation by the company’s managers. They feel that capital is abundant at present and thus are likely to make bad investment decisions. Moreover, the cash holding problem could incur takeover threat by other acquirers. Ample cash holding will attract counterparts to acquire this company since they can use these free cash to pay or compensate costs involved in acquisition. In other words, acquirers could pay way less than they originally expect to buy out this family-based family. The situation makes the acquisition a good deal for potential takeovers and hence increases the takeover risk of BKI.
In terms of its payout policy, we believe that there is still space for improvement. The payout ratios of the firm from 2004 to 2006 are 35%, 43.6% and 52.9%, which exhibit a growing trend in the amount of dividend paid out since the net income did not volatile much during this period. For investors, the periodical dividend is a symbol of healthy company business and...
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