 Farah Idrees

 Saad Sohail
5th May 2019 Blaine  Shams Nasir
Kitchenware Inc  Umair Siddiqui

The case in discussion, poses a question of capital restructure for Blaine Kitchenware Inc.

Blaine Electrical Apparatus was founded in 1927 before it became Blaine Kitchenware Inc. (BKI)in
2006 succeeded by Victor Dubinski as the CEO, specializing in kitchen appliance for household
customers. Within the small kitchen appliance industry there are 3 major segments, food
preparation appliances, cooking appliances, and beverage-making appliances. The biggest of
these 3 segments were clearly food preparation appliances and cooking appliances. Blaine had
their feet in all 3 of these segments and were regarded by consumers as being a company that
had a “cult” following for creating appliances that always made wholesome homemade meals.
However, this is when the competition became intense, with market share just under 10% where
mass manufactures and cheap imported substitutes cannibalized the entire category.
Consequently, forcing Blaine to expand its business to foreign markets to maintain profitability.
.
Blaine Kitchenware, Inc had maintained growth rate of 2% and compounded an average yearly
return of around 11%, however it was way below the industry average of 16%. Cash reserves also
fell from $286 to $231 million, most of which used to finance acquisition and dividends. This is
directly related to the consistent issuance of new shares to facilitate the two. Resultantly the
payout policy had became skewed, although cash spent on dividends had increased by $10,000,
from $18,000 to $28,000, but the dividends per share only increased by $0.03, $0.45 to $0.48 per
share, therefore the return on equity failed to grow proportionately. Questioning the company’s
strategy of acquiring companies as a profitable business strategy. Hence they could have had
essentially conducted acquisitions at market value, hedging the fluctuations in the cumulative
performance of the organization. The prime goal of any organization has been to increase
shareholder value.Blaine Kitchenware had an entirely equity based capital structure, with zero
leverage, making it very inefficient. The unproportioned capital structure had increased the
weighted average cost of capital, making way unreasonably expensive to execute projects and
maintain equitable investment returns. Hence, a debt would provide an interest tax shield,
lowering the weighted average cost of capital making profitable projects and consequently
increasing shareholder wealth.

However, a large share repurchase wouldaffect on many levels of company financials. Initially a
repurchase would immediately increase its EPS, withlower denomination.The first is the increase
in earnings per share. If their earnings indeed stay stable, and the total number of stocks is
reduced the earnings per share will obviously increase. This will lead to the price of the stock
increasing because of the increase in price per share. Followed by a possible tax advantage with
the reduction in WACC. This change in the capital structure will lower the taxable income for the
company. The third benefit of stock repurchase is that the stock price will increase most of the
time. When the investors in the company hear about the repurchase of stocks the stock price will
go up, which is obviously beneficial for the company. This repurchase of stocks also affects the
number of stocks that outside shareholder have, therefore decreasing float in the firm. In the
outside market it is also beneficial for the company as it alerts the outside world that cash flows
are robust.A stock buyback would also have advantages for the non-family shareholders. Blaine
Kitchenware has two distinct types of stockholders. Family members hold 62% of Blaine
Kitchenware’s stock while the remaining 38% is held by shareholders with no connection to the
firm. Family members would most likely view the stock buyback as a positive move, as this would
give them more control over the firm, assuming they held onto their shares. More centralized
control of the firm would allow for more flexibility in setting future strategy Nevertheless it would
accompany certain disadvantages with a stock repurchase At the time of announcement, the
stock price may rise but when the repurchase actually takes place the increase may be temporary.
Earnings could also be overstated, which could have had an adverse affectwith the value of
company being overstated.

As a result, a stock repurchase could be the financially appropriate decision at this time of the
case.

Below is an empirical illustration of the proposed plan of strategy.

(No change in financial statement is assumed)

$209 million of cash from its balance sheet

$50 million in new debt at a rate of 6.75% = used to repurchase 14 million shares at a price of
$18.50 per share.

Repurchase of Shares:
$209 Million - Cash

$50 Million - Debt + Interest of 6.75% ($3.375 Million) = 53.375 Million

Current Shares Outstanding after buyback: 45,052,000

Calculating earnings per share of Blaine Kitchenware requires that we subtract the interest
expense from the new debt from Blaine’s EBT. We then take use the company’s tax rate from
2006 to calculate the new net income. Based on these calculations, shareholders would see a
$.23 increase in earnings per share. This is a 25% improvement in earnings per share.

EBIT: $63,946,000 - $3,375,000 (Interest Tax Shield)

Plus: Other expenses: $13,506,000 holding all other figures constant (using 2006 figures)
EBT: $74,077,000

Tax Rate 30.75%

Taxes: $22,778,677.50
Net Income: $51,298,322.50

EPS = $51,298,322.50

45,052,000
 EPS = $1.14 per share

Change in EPS $1.14 - $0.91

$0.91

 25.27%

Net Income: $ 51,298,322.50

 ROE: 11.7%

Interest Coverage Ratio: 63,946,000

 Interest Coverage Ratio: 18.95

Total Assets: $592,253,000.00

 Debt Ratio: 28.98%

WACC: (833,462,000/833,462,000) * 11 + (50,000,000/833,462,000) * 6.75 * (1-.3075)

 WACC = 10.64%

A stock buyback followed by taking on $50,000,000 in new debt would have a positive impact on
ROE and the the company’s cost of capital. While their debt ratio would increase from 18% to
25%, this still a safe amount of debt for a company to have. Additionally, by looking at the
company’s interest coverage ratio, we can see that the company generates almost 19 times the
amount of interest they need to cover the new interest expenses they will be incurring. The
family will now own 81% of the firm instead of the 62% they had before based on the expected
size of the share buyback. This means that Blaine Kitchenware can get stronger financial results
while still having a reasonable level of debt. Financial results could be improved further with
more leverage if the owners so chose.