Blaine Kitchenware, Inc.
Questions
1. Do you believe Blaine’s current capital structure is appropriate? Why or
why not?
2. Consider the following share repurchase proposal: Blaine will use $230.5
million of cash from its balance sheet and $50 million in new debt-bearing
interest at the rate of 6.75% to repurchase 15 million shares at a price of
$18.70 per share.
a. How would such a buyback affect Blaine? Calculate the effect on
Blaine’s 2006 income statement and balance sheet assuming the
repurchase had already been executed. Work out the impact on,
among other things, Blaine’s earnings per share (Net Income/shares
outstanding), ROE (Net Income/Equity), its interest coverage
(EBIT/Interests) and debt (D/E and D/D+E).
b. How much would be the (present) value created by tax savings
[Consider that the increase in leverage is permanent]
c. Assuming that the net value created by the share repurchase is just
the value created by tax savings, as a shareholder, would you sell
your shares?
3. Suppose that Mr. Dubinski has obtained from Blaine’s banker the quotes
below for default spreads over 10-year Treasury bonds (A) [note that these
differ from the more general corporate bond yields in case Exhibit 4.]
Complete the table below (B) in order to compute the Blaine’s weighted
average cost of capital at each of the indicated debt levels.
What debt-to-capital structure would you recommend as optimal for Blaine
Kitchenware?
Additional data
A. Blaine’s banker quotes for default spreads
10-year Treasury 5.02%
Interest Coverage Ratio Debt Rating Default Spread
>13.0 AAA 0.65%
9.5-12.0 AA- 0.80%
7.0-9.5 A 0.85%
5.0-7.0 BBB+ 1.83%
4.0-5.0 BB 2.98%
2.5-4.0 B+ 4.10%
B. Table to be completed
Debt ($m) (230,000) 85,000 110,000 150,000 180,000 200,000 215,000
Suggested rating N/A ? ? ? ? ? ?
Cost of Debt N/A ? ? ? ? ? ?
2006 EBIT ($m) 63,946 63,946 63,946 63,946 63,946 63,946 63,946
Interest Expense N/A ? ? ? ? ? ?
Coverage Ratio N/A ? ? ? ? ? ?
Effective rating N/A ? ? ? ? ? ?
D/E+D ? ? ? ? ? ? ?
D/E ? ? ? ? ? ? ?
Levered Beta 0.56 ? ? ? ? ? ?
Cost of Equity ? ? ? ? ? ? ?
Effective cost of
Debt 3.01% ? ? ? ? ? ?
WACC ? ? ? ? ? ? ?
Notes:
1. Be aware there isn’t a “correct answer” to the case. You will have to make
some assumptions that should be clearly justified to improve your final
mark.
2. Your case solution (Excel file called “Sneaker 2013 – Template”. Please add
your name to the file name) should be sent by e-mail until 4.30 pm of
November 6 ([email protected]).
3. I am available to help you regarding any doubt you will have during your
work.
Good work!
