is considering a stock repurchase program. CPK had practiced conservative fiscal policy to ensure “staying power;” but with interest rates set to rise and competition falling behind‚ this could be the perfect time to take on more risk. With this in mind‚ CFO Susan Collyns is considering levering her company’s equity by purchasing stock with debt. 2) How does Debt add value at CPK? (values in thousands) - Do Nothing: ROE‚ WACC ROE: NI/BVofE (20299/225888)= 8.99% ROE: NI/MVofE (20299/643773)=
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CFO‚ and her team were faced with the decision of a share repurchase program. They had little money in excess cash though‚ so a repurchase agreement would mean debt financing. A share repurchase would send a positive signal to the market‚ with future values expected to be high. The financial team also needs to decide on the appropriate capital structure. Because of the low interest rates‚ CPK can issue the debt needed for a repurchase agreement at a low cost. Also because they have no previous
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importance of debt capacity in a growing business. Suggested Questions 1. In what ways can Susan Collyns facilitate the success of CPK? 2. Using the scenarios in case Exhibit 9‚ what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital‚ you may assume that a firm’s CAPM beta can be modeled in the following manner: L = U[1 + (1 − T)D/E]‚ where U is the firm’s beta without leverage
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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 $50 million and paying a 13.8% premium to buy back 14million (23.7%*59m) of the outstanding shares. After reviewed company’s current debt‚ equity and leverage levels situation‚ I believe that it is necessary to repurchase of 14 million
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company rarely begins regular dividend payments that it will be unable to continue in the future. Cessation of dividend payments is viewed a negative signal by the market. 5. The implication is that the company should not retain earnings unless the ROE of the new project is greater than the shareholders required return on equity. This is an intuitive result. Shareholders want the company to retain earnings for future growth if the earnings will earn a greater return than shareholders require. If
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Financial and Managerial Accounting M1-21 Applying the Accounting Equation and Computing Financing Proportions Use the accounting equation to compute the missing financial amounts (a)‚ (b)‚ (c). Which of these companies is more owner financed? Which of these companies is more non-owner financed? Discuss why the proportion of the owner financing might differ across these three businesses. ($ millions) Assets = Liabilities + Equity Hewlett Packard….$74‚708 = $36‚962 +
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5.5% 11.1% Gross Margin 30.0% 28.5% 27.0% EBIT Margin 21.4% 19.7% 18.7% EBITDA Margin 23.8% 22.4% 21.6% Effective Tax Rate (1) 32.0% 31.7% 30.8% Net Income Margin 18.2% 17.0% 15.7% Dividend payout ratio 35.0% 43.6% 52.9% Company’s profitability: ROE is Below Average: PAT Equity Ratio Home & Hearth Design $53‚698 475‚377.00
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Blaine Kitchenware Case Write-Up 1. Based on available information of BKI‚ we believe its current capital structure and payout policy are not quite appropriate. First of all‚ the company is under-levered and over-liquid when it comes to its capital structure. This company in fact issued no debt in 2006. This may result from its conservative management strategies and the fear of risk involved in the process of debt raising. And since the company is totally equity financed‚ it did
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debt-to-total-capital and 80% debt to total capital proposals. If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase its shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37. If BBBY were to use $400 million in excess cash‚ and borrow $1.27 billion to repurchase their shares‚ the increase of the basic earnings per share would only be 0.3 while the difference from zero debt to 40% debt-to-capital
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It seemed that the board of directors at MCI was divided between two possible solutions. Should the company finance the repurchase by increasing MCI’s debt financing by at least doubling the current debt-equity ration that stood at 36% at that time (MCI)? Conversely‚ would a more conservative approach of using an open-market purchase program‚ announcing its intentions to repurchase its stock from "time to time" but only as corporate funds become available‚ be more appropriate (MCI)? The answer to this
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