* 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