Blaine Kitchenware Inc.
Take-Home Case Assignment BSAD 342 Prof. Vishwakarma
| Grady McQuillanJoe MackayMitch ChownAlessandro Galeone
* Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
* The current capital structure and payout policies for Blaine’s Kitchenware Inc in our opinion is not the most appropriate. The firm’s structure is invested primarily in equity, for the most part (other than twice in their history) not incurring any debt. Although the company originally seemed to pride itself in not incurring debt it’s evident that it has long-term affects on the value of the firm. * Whether they considered that less debt would provide them with less risk or not, the fact is that they are not maximizing the value of their firm completely by staying away from debt financing. Although risk will increase when their debt increases, debt financing will lower the cost of capital primarily due to tax reduction. The firm will never reach their full potential by acting this conservative with their financing, and in return this affects their shareholders and payout policies. * As stated in the case, “Despite the company’s profitability, returns to shareholders had been somewhat below average”. This is due directly to their net income and the amount of book equity. Subsequently, Blaine’s ROE in 2006 was extremely lower than that of its peers. This creates a big problem for the firm because their returns are lower than others and it reduces how outsiders will value the firm. * Furthermore, their payout ratio has also been affected. From 2004 to 2006 there payout ratio has risen from 35% to 52.9%. This is due to the amount of cash spent on common dividends. The companies dividend per share has risen slightly over the past three years because of this, however, the company issued new shares with some of its acquisitions. The number of shares then rose accordingly, which subsequently reduced the earning per share of the company. From 2004 to 2006 the earnings per share dropped from 1.29 to .91, a significant drop for the previously invested shareholders. The average shares outstanding grew over 17 thousand shares. * There is a clear discrepancy in the company’s payout ratio, and as I’ve stated they are not maximizing the firm’s value by lowering the cost of capital. Blaine Kitchenware’s decision to be strictly conservative in their efforts for financing their firm forces the value of the shareholders to minimize. Their 100 percent equity approach may be the safest idea in their mind, however without the debt financing the company cannot take advantage of the tax shield and the reduction of overall taxes. Although riskier, debt financing leads to an optimal financial structure and because Blaine Kitchenware refuses to do so, we agree that their capital structure and pay out policy is not the most appropriate for the firm.
* Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move?
Dubinski should be recommending to Blaine’s board, a large repurchasing of shares for many solid reasons. The main reason being that Blaine’s Kitchenware’s Business is over liquid and under levered. In 1994 the Initial Public Offering happened which gave the founders family sixty two percent of the business. Since this initial public offering the share holders value has increasingly been diluted by the companies acquisitions of small independent manufactures because BKI stock had been used partly with cash for these purchases. These acquisitions have been good in terms of strong growth where BKI was weak in the beverage appliance segment, and growth in Blaine’s top line was attributed almost exclusively to these acquisitions. The consequences to these new acquisitions are that this has diluted the shareholders value, their earnings per...
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