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Blaine Kitchenware: Case Study: Blaine Kitchenware Case

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Introduction The main objective of this particular case study is to assist Victor Dubinski, the current CEO of Blaine Kitchenware, decide whether or not repurchasing shares and changing the firm’s capital structure in favor of more debt could actually be benefit the company and its shareholders.Blaine Kitchenware is a small cap, public company who focuses on selling various different residential kitchen appliances. Up until this point, the company has only used cash and equity financing to acquire independent kitchen appliance manufacturers, and expand into foreign markets abroad. Given their excess cash and lack of debt, Blaine Kitchenware is considered to be “over-liquid and under-leveraged” (Luehrman & Heilprin, 2009). Unlike all the different…show more content…
Return on Equity increased from 10.98% to 15.39%, showing that the firm is more profitable than before. Earnings per Share increased as well, as there were less shares outstanding with the repurchase while net income was unaffected. EPS increased from $0.91 to $1.04, another indicator that the leverage increased profitability. With the repurchase, Blaine’s D/E ratio increased, going from not having any debt at all to a D/E ratio of 11.48%, which is more inline with industry competitors. PE ratio fell as a result of the leverage. Stock price remained constant at $16.25 and EPS, as noted before, increased from $0.91 to $1.04. PE, which is stock price divided by EPS, decreased from 17.89 to 15.62. This can be interpreted as investors are willing to pay less for Blaine. The final financial metric to look at is WACC. Before the debt leverage, Blaine’s WACC was only the cost of equity, as they had no debt. Cost of equity was calculated using the 10 year UST rate, 5.02%, because it is a good measurement of the risk free rate, plus the firm’s beta, 0.56, multiplied by the risk premium, which we concluded to be 5%. This gave Blaine, when unlevered, a WACC of 7.82%. When taking the $40 million debt and $100 million cash buyout of stocks into account, cost of debt is now a factor. Cost of debt was 5.88%, the bond rating of a AAA rated company like we assume Blaine…show more content…
We understand the Blaine is a conservative company that doesn’t like to raise debt, but we believe that raising the right amount of debt will help drive value to the company and investors. As mentioned in our analysis, we believe it’s best to use $50 million of cash, $50 million of marketable securities, and raising $40 million of debt to repurchase shares. This means we can repurchase a total $140 million in shares. We recommend a 15% repurchase premium, which would set the repurchase price at $18.70. With that, we will be able to buy back approximately 7.5 million shares, or 1/8th of the total outstanding shares. From this, we are able to drive up the value of equity, while also building a tax shield to maximize our
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