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Blaine Kitchenware Case Study

Autor:   •  May 14, 2019  •  Case Study  •  527 Words (3 Pages)  •  18 Views

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Case 3

Question 1.

The main question of the case is should Blaine Kitchenware’s choose to buy back its own stock or not. If company decide on repurchase its own stock, they should think about to purchase it partly or completely. It should be also considered that this repurchase means rise in a debt and it will affect its capital structure. Also, another important question is that whether Blaine’s shareholders are going to sell their stocks back to the company or as a second option they can repurchase all stock from the market. As a group, we believe that Blaine current capital structure and pay-out policy are not appropriate for given reasons. Blaine has cash surplus and additional to that, they have smaller amount of debt. Cash surplus results in decrease in return of equity. Their current capital structure shows that company doesn’t take advantage of its cash surplus. If we consider company’s pay-out policies, repurchase proposal is beneficial in 2 ways, 1st is that by this company will increase value of their stocks and after repurchasing and 2nd is that by decreasing number of shares, dividend will be higher.

Question 2

There are both advantages and disadvantages of stock repurchasing. The first benefit of stock repurchase is income tax reduction because if the company is leveraged by this it also decreases the company’s amount of taxed income. Second advantage of stock repurchase is increase in EPS (earnings per share) because after that number of outstanding shares will decrease and as a result of this EPS will be higher. Third advantage is that repurchase announcement will both increase price of stock of company and also it will create a powerful image for the company. As well as advantages of this program there are also disadvantages. Some of these disadvantages are, the repurchase announcement can show the value of a company more than its actual value. This overvaluation can be dangerous for both shareholders and management board.

Question 3

Buyback effects on

  • EPS:

2016

2016 after buyback

NET INCOME: 53,630

NET INCOME: 53,630

# Of outstanding shares: 59,052

# Of outstanding shares: 59,052-14=45,052

EPS: 0,91$

EPS: 1.19$

Change: 30.8% increase

  • Return on equity

2016

ROE=NET INCOME/TOTAL EQUITY

         = 53,630/488,363=0.1098=10.98%

2016 after buyback

ROE=NET INCOME/TOTAL EQUITY              = 53,630/(488,363-259,000)=0.2338=23,38%

Change: 112%

  • Interest Coverage

=EBIT/Interest Exp=63,946/(50*0.0675%)=18.94

This high ratio states that company has small amount of debt that they can pay easily.

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