1) Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not? 2) Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move? 3) Consider the following share repurchase proposal: Blain will use $209 million of cash from its balance sheet and $50 million in new debt bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of 418.50 per share. How should such a buyback affect Blaine? Consider the impact on, among other things, BKI’s earnings per share and ROE, its interest coverage and debt ratios, the family’s ownership interest and the company’s cost of capital. 4) As a member of Blaine’s controlling family, would you be in favor of this proposal? Would you be in favor of it as a non family shareholder? 5) How does the proposal sketched above differ from a special dividend of $4.39 per share? 6) Suppose that Mr. Dubinski has obtained from Blaine’s banker the quotes below for default spreads over 10-year Treasury bonds. Note that these differ from the more general corporate bond yields in case Exhibit 4. What do these quotes imply about BKI’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure? Based on these calculations, how many shares should Blain purchase and at what price?
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