Short Write Up: Blaine Kitchenware, Inc.

1. Do you believe that Blaine's current capital structure and payout structures are appropriate? Why or why not?

a. I don’t think their capital structure and payout structures are appropriate. The company is financed though 100% equity and are too conservative. They need to unlever their beta. Adding debt will give more value to the company shareholders, as the cost of equity alone is getting expensive. The payout ratios are trending upwards and have grown 17.9 basis points since 2004. That is unacceptable to pay out over 50% of earnings especially when their return on equity is so low compared to industry averages.

2. Should Dubinski recommend a large repurchase to Blaine's board? What are the primary advantages and disadvantages of such a move?

a. Yes. One clear advantage of the repurchase is the value to the shareholders. Since the stock’s origination, there has been additional stock issuances used for purchases. This has diluted the company’s stock and the EPS has fallen from $1.29 in 2004 to $0.91 in 2006. EPS will rise with the repurchase and so will the stock’s price.

b. The disadvantage of the repurchase is the additional financial risk taken on by the debt incurred. While this is a disadvantage, I do not think it will hurt the company, as they will have a tax shield and obtain additional leverage.

3. Consider the following repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt bearing an interest rate of 6.75% to repurchase 14.0 million share at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, BKI's earnings per share and ROE, its interest coverage and debt ratios, the family's ownership interest, and the company's cost of capital. As a member of Blaine's controlling family, would you be in favor of this proposal? Would you be in favor as a non-family shareholder?

a. EPS: $53,630/ (59,052-14,000) = $1.19

i. This...