blaine case
THE FIRM IN THE CAPITAL MARKET
PROFESSOR: STEVE JONES
11/10/2013
MEMORANDUM
To: Victor Dubinski, CEO of Blaine Kitchenware, Inc.
From: Zhangkai Zhou Kelley School of Business MSA student
Subject: Is it a good idea for BKI to repurchase its own stocks?
Date: Nov 19, 2013
There is a banker pointed out that BKI is currently highly over-liquid and under-levered. He suggested to borrow money and to buy back own shares. In detail, the proposal is involves that borrowing another $50 million and paying a 13.8% premium to buy back 14million (23.7%*59m) of the outstanding shares. After reviewed company’s current debt, equity and leverage levels situation, I believe that it is necessary to repurchase of 14 million shares of stock at $18.50 per share.
As the banker mentioned that BKI is currently suffered with highly over-liquid and under-levered. The current capital structure and payout policies for Blaine’s Kitchenware Inc. are not the most applicable for the firm long-term growth. From the BKI’s income statement in 2006, the cash and securities reach to $230,886,000, which means that BKI did not make full use of its fund. In other words, BKI is lack of effective investments. On the other sider, BKI is totally debt free. In frank, it is not a bad thing. It means that the company works well and has enough capital to operate its business. However, if the company always stays in the free debt position, it may not be the best strategy for the company’s development.
In general, I believe that there are many advantages to accept the proposal.
Pro sides: (In thousands)
BKI can creative more value. In 2006 the equity of the company was $488363 and the Net income was $53596.78, so the ROE is 11%. If using repurchases shares strategy, the equity would drop to $229363 and the net income would turn into $41915.13. As the same amount of Equity, the later one creates more value. In shortly, ROE would increase
PROFESSOR: STEVE JONES
11/10/2013
MEMORANDUM
To: Victor Dubinski, CEO of Blaine Kitchenware, Inc.
From: Zhangkai Zhou Kelley School of Business MSA student
Subject: Is it a good idea for BKI to repurchase its own stocks?
Date: Nov 19, 2013
There is a banker pointed out that BKI is currently highly over-liquid and under-levered. He suggested to borrow money and to buy back own shares. In detail, the proposal is involves that borrowing another $50 million and paying a 13.8% premium to buy back 14million (23.7%*59m) of the outstanding shares. After reviewed company’s current debt, equity and leverage levels situation, I believe that it is necessary to repurchase of 14 million shares of stock at $18.50 per share.
As the banker mentioned that BKI is currently suffered with highly over-liquid and under-levered. The current capital structure and payout policies for Blaine’s Kitchenware Inc. are not the most applicable for the firm long-term growth. From the BKI’s income statement in 2006, the cash and securities reach to $230,886,000, which means that BKI did not make full use of its fund. In other words, BKI is lack of effective investments. On the other sider, BKI is totally debt free. In frank, it is not a bad thing. It means that the company works well and has enough capital to operate its business. However, if the company always stays in the free debt position, it may not be the best strategy for the company’s development.
In general, I believe that there are many advantages to accept the proposal.
Pro sides: (In thousands)
BKI can creative more value. In 2006 the equity of the company was $488363 and the Net income was $53596.78, so the ROE is 11%. If using repurchases shares strategy, the equity would drop to $229363 and the net income would turn into $41915.13. As the same amount of Equity, the later one creates more value. In shortly, ROE would increase