Question 1: Do you believe Blaine’s current capital structure and

payout policies are appropriate? Why or why not?

We think that BKI’s capital structure and payout policies are not appropriate.
There are some reasons :

1. Miller(1977) said that a firm’s value with debt is equal to the firm’s value
without debt plus the benefit of tax shield.
2. Because it’s liquidity is too high. It means that the company has too many cash
and marketable security, however, these current assets has lower return and the
ability of making profit is poor.
3. The company’s largest uses of cash had been common dividends, not for
investment. Therefore, the company is not able to use cash to make profit.
4. The company works at a low risk level, so its return is low and this do not
attract the investors in the secondary market.

2. Should Dubinski recommend a large share repurchase to Blaine

board? What are the primary advantages and disadvantages of such
a move?

We recommend Dubinski to buy back shares of Blaine board. There are several
reasons below:
A. Benefits
1. Shares buyback will decrease the number of shares outstanding and increase
the shares authorized and centralize the board member’s power to prevent
hostile from taking over.
2. Because share repurchase can get rid of the surplus cash, decrease the cash
carrying cost, and reduce the risk of unattractive reinvestment.
3. When excess cash is used to repurchase company stock, in order to increase or
pay dividends, the shareholders often have the opportunity to defer capital
gains and lower their tax bill if the stock price increases.

B. Pitfalls
1. It might cause shortage of cash using if BKI are willing to acquire other
companies and make future acquisitions for company.
2. The company will be unbalanced because most of shares are belonging to family
members so the non-family shareholders will not have enough right to make
decisions.
3. If the business foundation is not solid enough, the stock price will decrease after
the buyback; hence, the company will end up with lots of treasury stock on
lower value.

3. Consider the following share repurchase proposal: Blaine will use

$209 million of cash from its balance sheet and #50 million shares at a
price of $18.5 per share. How would such a buyback affect Blaine?
Consider the impact on, among other things, BKI’s earnings per

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 share and ROE, its interest coverage and debt ratios, the family’s
ownership interest, and the company’s cost of capital.

We use the regression analysis to estimate the EBIT and total liabilities.
The return of using 22 million(231million in cash in2006-209million) is
22,000,000*4.9%=1,078,000
The interest in new debt=50,000,000*6.75%=3,375,000
Net income=70,216,610(EBIT)+1,078,000-3,375,000=67919610
Net income after tax=67919610*0.6=40,751,766
Outstanding shares after repurchase=59,052,000-14,000,000=45,052,000

(1)EPS=40,751,766/45,052,000=0.905
It decreases from 0.91

(2)P/E ratio is 16.25/0.91=17.86

Stock price=0.905*17.86(P/E ratio)=16.16
It decreases from 16.25
The initial p/b ratio is (16.25*59,052,000)/ 488,363,000=1.96
new market value =16.16*45,052,000=728082500
New book value of equity= new market value / (p/b ratio)=
728082500/1.96=371465561.2
ROE=40,751,766/371465561.2 (New equity)=10.97%

(3)Interest coverage= EBIT/Interest expense=70,216,610/3,375,000=20.80

(4)Debt ratio=50,000,000/527,652,991.2 (total asset)=9.5%

(5)The Inceasing Portfolio of Family interest

=59,052,000/(59,052,000-14000000)-1=31.1%

(6)
β� = �� × [1 + (1 − �) × d/e]=0.56*[1+(1-0.4)*50,000,000/371,465,561.2]=0.605
�e = �f +β�× (�� − �f)=4.9%+0.605*(10%-4.9%)=0.0799
Total asset=371,465,561.2+50,000,000+106,187,430=527,652,991.2
�e=371465561.2/527,652,991.2=70.4% �d=1-88.1%=29.6%
Company’s cost of capital:
WACC = (�e× �e) + [Rd(1 − �)] × �d=( 0.0799*70.4%)+[4.9%*0.6]*29.6%=6.5%

4.As a member of Blaine’s controlling family, would you be in favor

of this proposal? Would you be in favor of it as non-family
shareholders?

After comparing both financial and non-financial aspects of this proposal, as

members of Blain’s controlling family we would undertake the deal. Statements
clearly proved that the company is over-liquid with enormous cash cushion and quite
under-levered in the same time. However, members of family can be concerned by

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 lowering of war chest and therefore increasing potential risk of insolvency in case
that unexpected events of crisis hit the company hard. From the other hand, taking
into account long family history in this company, member would welcome increased
stake that secure their influence in management and whole company from hostile
takeover.
From investors’ point of view is this transaction also convenient. Rising price from
16.25 to 18.5 per share can easily convince investors for selling with good profit.

5.How does the proposal sketched above differ from a specific

dividend of $4.39 per share?

We use the regression to estimate the EBIT of 2007 is $70,216,610, since Blaine
didn’t leverage before, N/I=70,216,610*0.6=42,129,966

(1) EPS=NI/n=42,129,966/59,052,000=0.71
(2) P/E ratio=17.86
Stock price=0.71*17.86=12.68
New market value =12.68*59,052,000=748,779,360
New book value of equity=748,779,360/1.96=382,030,285.7
Equity after $4,39 dividend=382,030,285.7-4.39*59,052,000=122,792,005.7
ROE=42,129,966/122,792,005.7=0.3431
(3) Interest coverage= 0
(4) Debt ratio=0
(5) Family’s ownership interest unchanged.
(6) ��=0.56
�e = �f + ��× (�� − �f)=4.9%+0.56*(10%-4.9%)=0.07756
Total asset=Equity=122,792,005.7
�e=100% d=0%
Company’s cost of capital: WACC = 0.07756

(thousands)
Repurchasing 14 million Paying $4.39 dividend per
shares at $18.5 share
Average shares
45,052,000 59,052,000
outstanding
EPS 0.91 0.71
ROE 10.97% 34.31%
Interest coverage 20.80 0
Debt ratio 9.5% 0
Family’s ownership
Increase 31.1% unchanged
interest
Company’s cost of
6.5% 7.756%
capital

We can find that the result of paying dividends have higher ROE than Repurchasing
shares, but Repurchasing shares will make Family’s ownership interest increase. Since

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 each policies have different advantages, it difficult to conclude which policies is
better, it judged by management’s preferences.

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