Professional Documents
Culture Documents
Group 7: Blaine Kitchenware Inc
Group 7: Blaine Kitchenware Inc
Group 7: Blaine Kitchenware Inc
Kitchenware Inc.
Maitreyee Shukla 122
Nikesh Solanki 123
Vasvi Gakkhar 124
Sakshi Madan 125
Chintan Shah 126
Sourabh Arora 387
Kumudini Mahajan 388
INTRODUCTION TO THE CASE
Vasvi Gakkhar
Blain Kitchenware
• Mid-sized producer of small Kitchen appliances.
• Well Known Brand
• Family promoted, Victor Dubinski CEO.
• Captures 10% of $2.3bn US market.
• Competitive advantage such as “smart” technology
Food
Preparation
Cooking
Appliances
Beverage
Making
Appliances
Major
Segments
Financial Policy
• Conservative financial posture
• 2 times in 85years company had debt
• On both occasions debt was repaid as quickly as possible
• Blaine’s balance sheet was the strongest in the industry
Main Problem
• Lacked organic growth
• ROE 11% , below industry average
• Downward trend in its operating margin
• Decreasing net margin
• Dividend payout ratio over 50%
Main Issues
• BKI is “over liquid and under-levered”
• PE firms purchase all outstanding shares
• Takeover of BKI
• Whether to “buy-back shares”
or to pay dividends???
Problem
• Consider the following share repurchase proposal: Blain will
use $209 million of cash from its balance sheet and $50 million
in new debt - bearing interest at the rate of 6.75% to
repurchase 14 million shares at a price of $18.50 per share.
How would such buyback affect Blaine? Consider the impact
on, among other things, BKI's earnings per share and ROE, its
interest coverage and debt ratios, the family’s ownership
interest, and the company’s cost of capital.
Concept of Buyback
• A company reacquiring/repurchasing its own shares
• A means for the company to invest in itself
• Leads to decrease in the number of shares outstanding in the
market
• Improvement in liquidity of shares & enhancement of the
shareholder’s wealth are the main motives
Concept of Buyback
• Profit earned by companies can be used in two ways:
2) “Stockholder’s equity”
Concept of Buyback
OR
Complete Buyback
Approach 1 : No Buyback
• Total Shareholder’s Equity : 59.052 million
• Net Income : $ 53.63 million
• ROE : 11.46 %
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
• Re = Ri + B(EMRP)
• Ri = Risk Free rate of return = 5.02%
• B = market Risk = .56
• EMRP = Equity market risk premium = (6.72- 5.02) = 1.7%
• Uses $209 million of cash from its balance sheet and $50
million in new debt
No buy-back
Partial buy-back
Complete buy-
back
Thank you.