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Case Blaine Kitchenware, Inc.

Blaine Kitchenware, Inc. is an all-equity cash-rich company considering the following change in capital structure:

• borrow $50 millions at an interest rate of 6.75%
• use the loan together with $209 millions of its own cash to repurchase 14 millions shares at the current market price of $18.50/share
• Currently, the (market value) balance sheet and the income statement of Blaine Kitchenware, Inc. are as follows (expressed in $ thousands) :

Assets

Cash $230,866

Other Assets $257,497

Total $488,363

Liabilities

Debt $0

Equity $488,363

Total $488,363

Revenue $346,366

Less: Cost of Goods Sold $249,794

Gross Prot $92,458

Less: Selling, General & Administrative Expenses $28,512

EBIT $68,060

Earnings Before Tax $68,060

Less: Taxes $23,821

Net Income $44,239

Dividends $28,345

Questions:

1. Create the pro-forma balance sheet and income statement taking into account the proposed change

in the capital structure, assuming the tax regime and payout policy (in terms of percentage of net

income paid out as dividends) remain unchanged

2. Calculate the dividends per share for the current and proposed capital structure and discuss how

capital structure aects the cash ows to shareholders

3. Discuss the benets and costs of higher leverage

4. What are the costs of nancial distress of Blaine Kitchenware, Inc. before the proposed share

repurchase? How do you expect them to change with leverage? Why?