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Copy of Blaine Kitchenware - Cost of Capital
Transcript of Copy of Blaine Kitchenware - Cost of Capital
Invested primarily in equity and not incurring any debt, debt financing will lower the cost of capital primarily due to tax reduction.
As ROE is extremely lower than others, their returns are lower than others and it reduces how outsiders will value the firm.
Their payout ratio has risen from 35% to 52.9%.
EPS dropped from 1.29 to .91, a significant drop for the previously invested shareholders.
Blaine Kitchenware - Cost of Capital
Hima Teja Sidda
Advantages and Disadvantages of Share Repurchase
Blaine’s Kitchenware’s Business is over liquid and under levered, which gave the founders family 62% of the business.
They should realize the need to acquire leverage and buy back stock.
Adv: Stock holders have a higher owner percentage and therefore the payout ratio can descend and earnings per share can ascend
Take advantage of this tax deductible financing
Dis Adv: Decreasing such a large amount of cash at once and make the companies risk significantly increase.
Share Repurchase Proposal
$209 million of cash
$50 million in new debt interest @ 6.75%
Repurchase 14.0 million shares
BKI’s EPS: An increase of $0.08/share. The EPS will go from $0.91 to $0.99
ROE: 10.98% all the way to 19.38%.
Interest coverage:incur an interest expense of $3,375
Ownership interest: Increase of about 16%.
Cost of capital: Positive impact on the company’s Cost of Capital causing a decrease of approximately 2%.
Would You Be In Favor of the Proposal
Increase total family ownership by about 19%,
It would also implement a tax shield that is created with the tax deductible nature of the interest payments
Would also create some leverage for the firm
Short-term investors will receive a premium price for their stock
Quotes implication about BKI’s cost of debt
These quotes imply that the cost of debt goes up as the debt rating decreases
Cost of debt increase corresponds directly with the increase in spread.
WACC at each of the indicated debt levels imply that the company’s WACC is lowest at ‘A’, making Debt Rating ‘A’ Blaine’s optimal capital structure.