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1. Do you believe Blaine's current capital structure and payout policies are appropriate? Why or why not? The fiscally conservative culture at Blaine Kitchenware (BKT) is what allowed it to achieve that led to a debt-free balance sheet with sizable cash and short-term investments. This resulted in the company having a capital structure solely consisting of equity. From a financial theory standpoint, an all equity capital structure is not considered the best for a publicly traded company. In theory, the optimal capital structure for a company is the combination of debt and cquity that results in the lowest weighted average cost of capital. This, in turns, results in the maximum value for the company. Although the cost of debt is cheaper than the cost of equity, it increases the financial risk to a firm. Plus, each subsequent issuance of debt by a highly leveraged firm costs more than the previous one. Additionally, increasing leverage raises the cost of equity, as expressed in the relationship between asset beta (BU) and quity beta (L). Although optimizing the capital structure through the addition of debt may increase the total value of the firm, especially considering the impact of the tax shield for det having no debt has its advantages. In the past, the company has primarily used cash or equity to finance acquisitions. It wouldn't have been unreasonable to use cash and debt to finance some of the acquisitions. One of the shortcomings of using stock to make acquisitions is that companies tend to pay more using stock than they would using cash because there is no large financial impact on the firm. Using debt would have been less dilutive on existing shareholders. Also, in pecking order theory, equity is the most expensive and least desirable source of funds for expansion because it has the highest expected return by investors. A challenge BKI must face is the perception of being considered a mature company, although it is one of the smallest in its peer group by revenue. Its beta, 0.56, suggests that it is a mature company that doesn't move much one way or another when the market moves. Its beta is also much lower than the average for its peer group and also suggests a low cost of equity, according to the Capital Asset Pricing Model Another challenge that BKI must address is the impact of share growth due to acquisition on the dividend payout policy. Its acquisition policies have resulted in more and more of the company's cash being used to fund dividend payouts, which have led to an increasing dividend payout ratio, slowing the growth of retained earnings and slowing the capacity to make future acquisitions. The acquisition premium for equity transactions is greater than that for cash transactions due to the volatility in return on the stock prices and the likely reduction in value if they try to sell a substantial portion of their new stock holdings Blaine Kitchenware's capital structure is good for a company that intends to grow organically, has relatively low annual capital expenditure requirements and wants to minimize financial risk to the firm over the long-term, especially recessions. The trouble with BKI's dividend payout policies is that it does reflect the policies of larger, more mature companies that have limited investment opportunities due to their sire. Examples include GE, IBM and Altria. With its approach to acquisitions and slow growth, is current policies are unsustainable. It is probably in the long-term interest of shareholders and the company for it to reduce its dividend payments, even if the stock would be punished by the market for such a step