Blaine Kitchenware Inc
Autor: 沁月 钱 • April 14, 2018 • Research Paper • 911 Words (4 Pages) • 503 Views
TO: Victor Dubinski, CEO of Blaine Kitchenware, Inc. (BKI)
FROM: Group 1-Qinyue Qian (write-up), Jiani Zhou, Sijia Liu
DATE: February 11th, 2018
SUBJECT: Blaine Kitchenware Inc. (BKI)
Evaluation for Blaine’s current capital structure and payout policies
BKI is too conservative in its financing strategy with only two borrowings in the history. Currently, the firm uses all equity financing without any debt, which leads to the firm’s highly-liquid and under-levered position. In our opinion, this capital structure is not optimal based on following reasons:
- Low return on equity(ROE): in 2006, the company’s 22% EBITDA margin is the highest among its peers while its 11% ROE is the lowest due to Blaine’s high book value of equity. Also, as a firm with a large portion of shares held by family members, the high volume of shares outstanding may lead to the dilution of these members’ power.
- No tax shield and high cost of capital: interest is tax deductible while dividend is not. Also, required return on equity is mostly higher than return on debt since investors are in lower priority of getting back their money in bankruptcy. So the avoidance of using debt will increase the cost of capital.
- Surplus cash: surplus cash also serves as negative debt and decreases the firm’s value. And the free capital in the balance sheet shows a waste and misallocation of resources.
To maximize shareholder’s value, investing in projects is more optimal than paying dividends. With over 50% payout ratio and large volume of shares outstanding, it requires a large amount of dividend payment without any tax benefit, which may sabotage the growth of the company.
Advantages and disadvantages of large share repurchase
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Overall, we believe share repurchase using excess cash and debt is a great strategy. It can decrease the amount of dividend payout without causing dissatisfaction from current investors. Also, with high EBITDA and less risky balance sheet, the stock value should not be negatively impacted due to lack of confidence from public.
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