Case 2 - Blaine Kitchenware 2017

Evening
MBA Managerial Finance

FIN 510B
Case #2 Blaine Kitchenware
Learning Objectives
Decide on the optimal capital structure of a firm
Analyze and calculate the impact of debt and stock issuance, purchases, dividend payments.
Identify the motivations of various stakeholders (owners, lenders, management, bankers) in influencing
capital structure
Calculate the WACC and change in WACC based on various capital structures
Deliverable & Due Date

You should approach this case as a business analyst asked to complete this task for your boss (the CFO) your
work and written report should present comprehensive answers to the questions posed in a manner similar to
how you would report to your boss answer the questions completely and efficiently; if you think there are key
issues not addressed (or assumptions made, etc), or ideas youve generated that may be valuable to the decision
making, be sure to include them in your report.
Student teams need to submit their assignments to Turnitin by 4pm (start of class) on Wednesday, Nov 15th.
One assignment per team is required. Submissions should be a single word doc/team, including all necessary
charts/tables/number cut and pasted into the document; include the names of each team member and Group #
at top of assignment. In addition, two groups will be required to present a case summary and an explanation of
their analysis & answers in class; teams will be determined at random the week prior -- teams (and each team
member) should be prepared to present their work. To facilitate any presentation discussion, you should save a
copy of your assignment and any Excel work onto a flash drive you will upload to facility your analysis and
discussion with the class the week you are selected to present.
Materials
The case brief, Blaine Kitchenware Inc: Capital Structure, can be found on your Harvard Business Review
coursepack and herein. I recommend reading the questions below prior to the case to know which areas of the
reading to focus on. No outside research on Blaine is necessary nor recommended for the completion of this
case use the information provided in the case, as well as concepts learned in this class and others, to answer
each of the questions.
Case Reading:
https://cb.hbsp.harvard.edu/cbmp/pl/71047395/71185022/bfc5a120731631dbf5b3823fc4d8ad74
Case Excel Sheet:
https://cb.hbsp.harvard.edu/cbmp/pl/71047395/71185025/488a3bc5f791717d483a9fa8c889aeb0
Overview
Blaine Kitchenware Inc (BKI) is a publicly traded company with large insider/family ownership. It operates in the
Kitchen gadget business, which is highly fragmented and quite mature, growing at ~2%/year; the company
surpasses the average growth rates in the industry by expanding into new markets and/or acquiring companies.
It has historically adopted a very conservative balance sheet strategy, avoiding all debt financing unless
absolutely necessary under economic conditions.
The company is currently contemplating altering this strategy based on a bankers comment that such a strategy
is a detriment to current shareholders and suboptimal for maximizing the value of its equity. The company
generates consistent positive free cash flow of which ~ 50% was returned to shareholders as a dividend and the
balance retained to fund potential acquisitions.
Case Questions:
1. At year end 2006, Blaine had $230 mm of cash & securities and $0 mm of debt or -$-230 mm of net debt
(Exhibit 2; net debt = debt minus cash) and -24% net debt/market equity ratio (Exhibit 3; net debt/equity
market cap). Do you believe Blaines current capital structure and payout ratios are appropriate for the
company? Is it maximizing its financial efficiency? Is the companys current leverage and liquidity a
benefit or detriment to shareholders? Explain. Be sure to consider the relationship between capital
structure, taxes, and firm value.
2. Should the CEO (Dubinski) recommend a large share repurchase and/or a dividend program to the
board? Why - what are the main advantages/disadvantages of each for the company? For its
stakeholders (i.e. lender, owners, mgmt, employees)?
3. Consider the following share repurchase proposal: Blaine will use $209 mm of cash from its balance
sheet plus $50 mm in new debt issuance (at 6.75% interest rate) to repurchase 14.0 mm shares at
$18.50/share (or ~ 14% premium to current stock price).
a. How would the buyback affect Blaine? Analyze changes to the companys financial results and
ratios (i.e. compare before and after repurchase) for: net profit margin, EPS, ROE, leverage &
coverage ratios (at least 3) and any other financial metrics youd like to highlight.
b. How would Blaines new proposed capital structure compare with its peers (use Exhibit 3)?
c. What is the companys current WACC? What is the company WACC after the proposed share
repurchase plan? (For WACC Calculations: Rf = 10 yr Treasury (5.02%), Market Risk Premium
(Rmp) of 5%, and marginal tax rate of 40% per Exhibit 1 note)
4. The companys dividend payout ratio has climbed from 30% to 50% over the past 3 years .Is this
optimal and/or sustainable if the company pursues the proposed repurchase deal in #3 above?
Comment as it relates to: (1) financial results/ratios; (2) signaling; (3) business and financial risk.
5. An underlying theory of capital structure is that a company that minimizes its WACC will maximize its
firm value, that the capital structure that minimizes WACC is the optimal capital structure. The WACC &
capital structure also needs to fit the risk profile of a company/industry and be acceptable to the
needs/risk tolerance of its shareholders. Propose an alternate capital structure recommendation (i.e.
different from current and proposed in #3). Give specific information, i.e. recommended weights of
debt and equity, any share issuance/repurchase? Dividend? Issuance of Debt? Use of proceeds?
Explain why you recommend this strategy, i.e. use the proforma financial ratios, proforma WACC,
comparison to peers, shareholder acceptance, company strategy, etc to analyze (support) your
proposed structure.
Copyright Arizona Board of Regents Page 2 of 3

6. If you were a member of Blaines controlling family, would you support the debt issuance & 14 mm
share repurchase program proposed in question #3? As a controlling family member, would you be
more/less in favor of this proposal (#3) or your alternate recommended proposal (from #5)? Elaborate.
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MBA Managerial Finance

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