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Do you believe Blaine’s current capital structure and pay-out policies are appropriate? Why or why
not?
BKI has a conservative capital structure, it is debt free with sizeable cash and short-term
investments. The pay-out ratios have been constantly increasing. The capital consists of equity
solely. An all equity capital structure is not the best for a publicly traded company. Due to lower EPS,
diluted share holding, Cost of capital is higher, missing out on benefit of Interest tax shield.
Lowest WACC cost structure should be taken, which gives maximum value of company
The risk v/s trade-off return needs to be considered, increasing leverage increases the cost of equity.
The company could have easily used debt to finance some of its previous acquisitions.
Also, in Pecking order hypothesis equity is the most expensive and least desirable source of funds for
expansion, since it has the highest expected returns by the investors. (higher hurdle rate)
More and more of company’s cash is being used to fund dividend pay-out.
Will also allow the founding family to increase their relative ownership.
consider thr following share repurchase proposal: Blaine 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 a 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.
Shares
purchased Price
14000 18.5 259000
Interest
expense 3375
After Buy
2004 2005 2006 back
Net income 53112 52435 53630 51261
Dividends 18589 22871 28345 27117
Average shares outstanding 41309 48970 59052 45052
earnings per share 1.29 1.07 0.91 1.14
Dividend per share 0.45 0.47 0.48 0.60
Payout ratio 35% 43.6% 52.9% 0.529
Owner's holding 62% 81.27%
new cost of
equity 8.9%
Cost of debt 6.75%
New cost of
Cost of capital 8.15% capital
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 a non-family shareholders?
As a non-family share holder my dividend per share increases also my EPS increases.
5) Compute BKI's WACC at each of the indicated debt levels. What do your calculations imply
about Blaine's optimal capital structure? Based on these calculations, how many shares should
Blaine purchase and at what price?
Debt 0 10 20 30 40 50 60 70
Equity 100 90 80 70 60 50 40 30
Beta Unlevered 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56
Beta levered 0.56 0.60 0.66 0.73 0.82 0.95 1.14 1.46
Cost of equity 8.4% 8.7% 9.0% 9.4% 9.9% 10.7% 11.8% 13.7%
Cost of debt (by bond
yields) 6.75% 6.75% 6.74% 7.06% 7.68% 8.42% 10.74% 12.86%
cost of capital 8.40% 8.26% 8.11% 8.03% 8.08% 8.26% 9.19% 10.35%
Debt 86509
Equity 288363