Blaine Kitchenware is issuing stock to raise money for their business. BKI plans repurchase its own shares. This means BKI plans to invest into its own company. The company’s main issue is the fact that it is over liquid and under-levered and whether to distribute cash to shareholders by buying back shares or paying dividends. The answer is easy as this; BKI has to spend money to make money. Lucky for them they have the money and have more than enough to invest into their company. When BKI repurchase their shares they are sending the message that their stock price is affordable. Only BKI will know how much the company is worth. This leads to a decrease in the number of shares outstanding in the market. BKI is looking for improvements in liquidity of shares and enhancement of the shareholder wealth Profit earned by BKI can be used by rewarding shareholders in the form of dividends and capital expenditures. In recent years the company’s largest uses of cash had been common dividends. Dividends per share had risen only modestly during the years 2004, 2005 and 2006. The average capital expenditures during the past three years were just over $10 million per year. BKI would go into buy back because they have unused cash and their share valuation should be higher. Because BKI has excess cash and not many other projects to invest into, it is better for them just to reinvest in what they already have. Buyback of shares is mostly done at a higher price than the current market price of the stock. So on numerous occasions, BIK, by buying their own shares at a price higher than prevailing market price, company signals to the market that its share valuation should be higher. From what we have gathered, there are many advantages of the buying back of shares. Some advantages are increase confidence in management, enhances share value, high share price, reduce takeover chances, increases ROE, psychological effect and excellent tool for financial reengineering.
There are many reasons why a company would do a buyback of shares. One of the main reasons why a company would buy back their shares is if they have excess amounts of cash. If a company believes their share price is undervalued, they will do a buy back in hopes of raising the share price. Another reason is that since dividends are always taxed at a higher rate than capital gains, companies will often prefer to do a buyback for their shareholders, rather than distribute dividends. Also, companies often do a share buyback if they plan on leaving the country or if they want to close the company. When deciding whether to repurchase shares or not, we consider three of the following scenarios:
BKI should not do any type of buyback.
BKI should only do a partial repurchase of shares.
BKI should do an entire buyback of shares.
Each option will be looked at thoroughly in the following calculations.
Number of shares: 59,052
Net Income: 53,630
Therefore EPS = Net Income ÷ Number of Shares
= 53,630 / 59,052
= 0.91 (Rounded)
Price per share = $16.25
Price to earnings ratio = Market Price ÷ EPS
= 16.25 / 0.91
ROE Calculation = Net Income ÷ Shareholder’s Equity
ROE = 53,630 / 488,363
Total Cash & Cash Equivalents = 66,557
Marketable Securities = 164,309
Total amount available for buyback = 230,866
Number of Shares bought = 230,866 / 16.25
Therefore the number of shares remaining = 59,052 – 14,207
Calculation of EPS = Earnings per share ÷ total number of shares The company could have invested in U.S. treasury securities so now we will have to account for the loss in interest earnings had it invested in those securities. This interest rate is calculated by averaging out all the yields on U.S. treasury securities provided in Exhibit 4 which equals 4.92%. This means net earnings now equals: 53,630 – (4.92% x 230,866)
= 53,630 –...
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