Blaine Kitchenware

Blaine Kitchenware’s current capital structure, being financed primarily through equity, is not the best option to realize the optimal value for the firm. BKI has remained relatively debt free, with the exception of twice in the company’s history. BKI’s recent growth is due to new acquisitions and the expansion of products into global markets, however, their organic growth is lacking. BKI’s large amounts of equity results in a significantly low ROE (11%) compared to the industry average. In 2007, BKI has $231 million in cash sitting on the books with no debt.

A large portion of the company’s shares are held by the family members, which means their preferences in management are very conservative. However, Dubinski should recommend a large share repurchase to the board. Having such a large amount of cash and no debt on the balance sheet does have an opportunity cost. The cash needs to be put to good use to start adding internal value to the company. If they repurchase a large amount of shares it would correct the dilution of the company’s value from all of the recent acquisitions and also increase EPS. They are also paying out larger dividends per share, which leads to a high dividend payout ratio of over 50%. High dividends do not guarantee the company’s success. In order to remain attractive to prospective investors, dividends should continue to be paid, but at a lower amount to maximize the shareholder’s value.

While BKI has remained virtually debt free, they also are missing out on the tax advantages that would be attained through financing. Interest expenses rise when debt is increased and in turn reduces taxable income. This would result in a higher rate of return for BKI. The obvious disadvantages of the company repurchasing its shares would be the higher amount of risk that they would take on in doing so. A company should have a healthy balance of their risk versus returns. Since BKI needs to generate higher returns, they should assume more risk and...