A diversified mid-sized manufacturer of kitchen tools contemplates a stock repurchase in response to an unsolicited takeover.
Question:
A diversified mid-sized manufacturer of kitchen tools contemplates a stock repurchase in response to an unsolicited takeover. The company must determine the optimal debt capacity and capital structure, and subsequently, estimate the resulting change in firm value and stock price. Attention is also given to the value of interest tax shields.
1. Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
2. Should Dubinski recommend a large share repurchase to Blaine’s board?
3. What are the primary advantages and disadvantages of such a move? Consider the following share repurchase proposal: Blaine will use $209 M of cash from its balance sheet and $50 M in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback affect Blaine? Consider the impact among other things, BKI’s earnings per share and ROE, interest coverage and debt ratios, and the family’s ownership interest.
4. As a member of Blaine’s controlling family, would you be in favor of this proposal?
5. Would you be in favor of it as a non-family shareholder? What are the pros and cons of financial leverage?
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen