Blaine Kitchenware

Capital Structure
ANNAS AMAN
MUSSADIQ NISAR
HAREM SHEHZAD
About the Case
•Few Facts About the Case
•In 2006, Most of the revenues collected from US Wholesalers and Retailers.
•Made products outside of US.
•Cash securities decreased from $286mn in 2004 to $231mn in 2006.
•Largest uses of cash included Dividend payment and parts of acquisitions.
•It has only obtained long-term financing twice in its history beyond seasonal working capital
needs (first during World War II and second time during the first oil shock of 1970)
 Equity V/S Debt
Equity
Less Fixed Cost (Interest)
Ownership

Debt
Modigliani and Miller Model, there are advantages of maintaining a certain amount of debt as it adds value to
the company in the form of a tax shield provided by the tax-deductible interest on the debt.
External Control oversight
Decrease in WACC
Decrease in Credit Ratings
Increase in Fixed Costs
Should the company Repurchase?
BLAINE KITCHENWARE

Shares Repurchase 14000

Buyback Price 18.5
How
Debt Much?
Interest Rate 0.07
First & Second Scenario
1. Debt Taken of 70 Million for Repurchase @ 7%
2. No Debt taken for repurchase.
Assumptions
No Dividends
Constant other Income
Percent of Sales Method to forecast
Balance Accounts remain the same
 Margins: 2004 2005 2006 Average
Revenue Growth 3.2% 5.5% 11.1% 6.6%
Gross Margin 30.0% 28.5% 27.0% 28.5%
EBIT Margin 21.4% 19.7% 18.7% 19.9%
EBITDA Margin 23.8% 22.4% 21.6% 22.6%
Effective Tax Rate (1) 32.0% 31.7% 30.8% 31.5%
Net Income Margin 18.2% 17.0% 15.7% 17.0%
Dividend payout ratio 35.0% 43.6% 52.9% 0.4382
These Plus: Other Income (expense) 15,719 16,057 13,506 15094
Ratios are Average shares outstanding 41309 48970 59052
used Earnings per share 1.29 1.07 0.91 1.09
through Dividend per share 0.45 0.47 0.48 0.4667
out the Risk Free Rate 10 Years 5.02%
Scenarios Moody's Aaa 5.88%
Spread 0.86%
Average Tax 31%
Average shares outstanding 59052
After Stock Repurchase 45052
Equity beta 0.56
Debt 70000
Other Income (2006) 5.9%
S&P Return 10%
Growth of 3% 0.03
Income Statement

Operating Results: 2006 2007 (70 Mill) 2007 No debt

Revenue 342,251 352,519 352,519
Less: Cost of Goods Sold 249,794 252,011 252,011
Gross Profit 92,458 100,508 100,508

Less: Selling, General & Administrative 28,512 30,290 30,290

Operating Income 63,946 70,217 70,217
Plus: Depreciation & Amortization 9,914 9,350 9,350
EBITDA 73,860 79,567 79,567

EBIT 63,946 70,217 70,217

Less: Interest Expense 4,900 -
Plus: Other Income (expense) 13,506 13,506 13,506
Earnings Before Tax 77,451 78,823 83,723
Less: Taxes 24,377 24,809 26,351
Net Income 53,074 54,014 57,372
Dividends 28,345 - -
Retained Earning 24,729 54,014 57,372
 Cash and Equvi (Post)
Cash Calculation Debt No debt
Cash Inflows =
After-tax operating O/p 230,866 230,866
cash flow + Interest
Income - Interest Less Buy back 189000 259000
Expense
Cash Inflows 63,364 66,722
Less Div - 0

Closing Balance 105,230 38588

 WACC Calculation
Pre Post
Debt WO Debt
Equity 488,363 Equity 426,596 429,954
Debt 0 Debt 70000 0

We 1 We 86% 1
Wd 0 Wd 14% 0
D/E 0 D/E 0.1640895 0

Beta UnL 0.56 Beta L = Beta unL * (1+(1-T)*(D/E)

0.62

Cost of Debt 0 5.88% 0

Cost of Equity 7.808800% 8.122384% 7.8%

WACC 7.8% 7.5% 7.8%

Pre Analysis Debt Taken Post Analysis
70000
With Debt WO Debt
WACC 7.8% WACC 7.5% 7.8%
EBIT 63,946 EBIT 70,217 70,217
Interest Expense 0 Interest Expense 4900 0
EBT 63,946 EBT 78,823 83,723
EAT / NI 53,630 EAT / NI 54,014 57,372
EPS 0.91 EPS 1.199 1.273
Cash and Equvi 230,866 Cash and Equvi 105,230 38588
Debt Taken 0 Debt Taken 70000 0
Divident Payout Ratio 52.9% Divident Payout Ratio 0 0
other income 13506 other income 6,156 0
Cash Used 189000 259000
Debt Used 70000 0
Shares Outstanding 59052 Shares Outstanding 45052 45052

Ratios Ratios
Debt $0 Debt 70000 0
Book equity 488,363 Book equity 426,596 429,954.21
D/E 0.00% D/E 0.16 -
ROE 10.98% ROE 12.66% 13.34%
Family Stake % 100% Family Stake % 86% 100%
Scenario 3
Full Debt taken to repurchase
With same assumptions and rates
Growth of 3% 0.03
Income Statement
Operating Results: 2006 2007
Revenue 342,251 352,519
Less: Cost of Goods Sold 249,794 252,011
Gross Profit 92,458 100,508
Less: Selling, General & Administrative 28,512 30,290
Operating Income 63,946 70,217
Plus: Depreciation & Amortization 9,914 9,350
EBITDA 73,860 79,567

EBIT 63,946 70,217

Less: Interest Expense 18,130
Plus: Other Income (expense) 13,506 13,506
Earnings Before Tax 77,451 65,593
Less: Taxes 24,377 20,645
Net Income 53,074 44,948
Dividends 28,345 -
Retained Earning 24,729 44,948
Pre Analysis Debt Taken Post Analysis
259000
With Debt
WACC 7.8% WACC 7.1%
EBIT 63,946 EBIT 70,217
Interest Expense 0 Interest Expense 18130
EBT 63,946 EBT 65,593
EAT / NI 53,630 EAT / NI 44,948
EPS 0.91 EPS 0.998
Cash and Equvi 230,866 Cash and Equvi 96,164
Debt Taken 0 Debt Taken 259000
Divident Payout Ratio 52.9% Divident Payout Ratio 0
other income 13506 other income 13506
Cash Used 189000
Debt Used 70000
Shares Outstanding 59052 Shares Outstanding 45052

Ratios Ratios
Debt $0 Debt 259000
Book equity 488,363 Book equity 417,530
D/E 0.00% D/E 0.62
ROE 10.98% ROE 10.77%
Family Stake % 100% Family Stake % 62%
All comparison
Assets: 2006 70 Mill Debt 2007 No debt 2007
Cash & Cash Equivalents 66,557
Marketable Securities 164,309 105,230 38588 230,866

Debt 0 70000 0 259000

Shareholders' Equity 488,363 426,596 429,954 417,530
Income Statement & snipets of Balance Sheet
Operating Results: 2006 70 Mill Debt 2007 No debt 2007
Revenue 342,251 352,519 352,519 352,519
Less: Cost of Goods Sold 249,794 252,011 252,011 252,011
Gross Profit 92,458 100,508 100,508 100,508

Less: Selling, General & Administrative 28,512 30,290 30,290 30,290

Operating Income 63,946 70,217 70,217 70,217
Plus: Depreciation & Amortization 9,914 9,350 9,350 9,350
EBITDA 73,860 79,567 79,567 79,567

EBIT 63,946 70,217 70,217 70,217

Less: Interest Expense 4,900 - 18,130
Plus: Other Income (expense) 13,506 13,506 13,506 13,506
Earnings Before Tax 77,451 78,823 83,723 65,593
Less: Taxes 24,377 24,809 26,351 20,645
Net Income 53,074 54,014 57,372 44,948
Dividends 28,345 - - -
Retained Earning 24,729 54,014 57,372 44,948
 Pre 70 Mill Debt WO Debt Full Debt
WACC 7.8% 7.5% 7.8% 7.09%
EBIT 63,946 70,217 70,217 70217
Interest Expense 0 4900 0 18130
EBT 63,946 78,823 83,723 65593
EAT / NI 53,630 54,014 57,372 44948
EPS 0.91 1.199 1.273 1.00
Cash and Equvi 230,866 105,230 38588 96164
Debt Taken 0 70000 0 259000
Divident Payout Ratio 52.9% 0 0 0
other income 13506 6,156 0 5626
189000 259000 189000
70000 0 70000
Shares Outstanding 59052 45052 45052 45052

Ratios
Debt $0 70000 0 259000
Book equity 488,363 426,596 429,954 417530
D/E 0.00% 0.16 - 1
ROE 10.98% 12.66% 13.34% 0
Family Stake % 100% 86% 100% 1
Leverage Ratios
2007 Full
2006 2007 Debt 2007 No Debt Debt
Debt-to-Assets Ratio 0.18 0.29 0.18 0.18
Total Debt / Total Assets
Debt-to-Equity Ratio 0.21 0.41 0.24 0.25
Total Debt / Total Equity
Asset-to-Equity Ratio 1.21 1.39 1.38 1.42
Total Assets / Total Equity
Debt-to-EBITDAX 1.41 2.19 1.31 1.31
Interest Coverage Ratio

Operating Income/Interest
Expenses 0.00 14.33 0.00 3.87
Questions
Comment on the current capital structure and payout policy?
Show the pre-and post-buyback family stake% in the business? As a member of the Blaine’s
controlling family, would you be in favor of this proposal. Would you be in favor of it as a
nonfamily shareholder?
Do you think the proposed buy back will affect the value of the company?