To:Blaine Kitchenware Inc. Board of Directors
CC:Mr. Victor Dubinski
Re:BKI stocks repurchase
To review Blaine Kitchenware Inc.’s (BKI) current debt, equity and leverage levels with respect to the highly advisable repurchase of 14 million shares of stock at $18.50 per share and the related, necessary financing.
BKI is currently highly over-liquid and under-levered. The firm can anticipate elevated tax rates due to the lack of debt held. BKI has also experienced falling earnings per share (EPS) due to the over issuing of stock. Similarly the large quantity of outstanding shares of stock has led to below average returns to shareholders and a return on equity (ROE) below the competitors’ ROEs. BKI can offset these downward trends by increasing leverage—i.e. increasing debt—and reversing the dilutive acquisitions. BKI is highly recommended to obtain a 25 year loan of $50 million at 6.75% with which to repurchase 14 million of its outstanding shares of stock at the price of $18.50 per share, $2.25 above current stock price.
Balance Sheet Impact
As shown below, under the appendix, the pro forma balance sheet demonstrates forecasted values if BKI continues without action to increase leverage and decrease outstanding stock. BKI can expect to have $ 510,624,920.99 in stockholders’ equity and $ 96,011,793.33 in cash and cash equivalents on which BKI will be liable at a 40% tax rate, significantly higher than previous fiscal years.
Based on trends from 2004-2006, BKI can predict increases in current asset accounts and marginal decreases in fixed asset accounts. Without the pursuit of repurchase and increased debt, BKI’s current liabilities accounts will also experience marginal increases while other liabilities and deferred taxes decrease and long term debt remains at zero. Furthermore, before the repurchase of stock, BKI’s equity accounts may continue to increase.
Applying the repurchase strategy to...