1. From reading the case, do you believe Blaine’s capital structure and dividend payout policies are appropriate? Why or why not?
2. Should Victor Dubinski recommend a share repurchase to Blaine’s board? What are the expected advantages and disadvantages of such a move?
3. We are not provided a precise share repurchase proposal from the case. Begin by considering the following one:
- a.Blaine will undertake a $259 million share repurchase.
- b. Funding
i. $209 million from existing cash and marketable securities on its 2006 balance sheet
ii. $50 million in new debt at an interest rate of 6. 75%
- c. Repurchase details
iii. 14. 0 million shares
iv. Purchase price = $18. 50 per share
4. How would such a buyback affect Blaine Kitchenware? You might consider the impact upon the following:
- d. EPS
- e. ROE
- f. Interest coverage ratios
- g. Debt ratios
- h. Family’s ownership interest
- i. Firm’s cost of capital (Developing both a hypothetical income statement and balance sheet for 2006 as if they had done the repo will be helpful with this type of analysis. )
5. Assume you are a member of Blaine’s controlling family. Would you be in favor of this proposal? Would you opinion differ if you were a non family shareholder?
6. Does the share repurchase proposal of $259 million in question 3 above differ from a special one-time dividend of $259 million?
7. Assume that Victor Dubinski has obtained from Blaine’s investment banker the quotes below for default spreads over 10-year Treasury bonds. What do these quotes imply about Blaine’s cost of debt at the various debt levels and credit ratings? What would be Blaine’s WACC at each of the indicated debt levels? What do these calculations imply about Blaine’s optimal capital structure? (The historical market equity risk premium for the 50 years ending in 2006 had been 4. 60 %. ) (This table is included as a worksheet in the introductory Excel file for this case.)