Blaine Kitchenware, Inc.: Capital Structure Case

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Blaine Kitchenware, Inc. (BKI) is a mid-sized company that produces small appliances used in residential kitchens. Their three major segments are food preparation appliances, cooking appliances, and beverage-making appliances. Most of their revenues come from the food preparation and the cooking appliances. Blaine is a well-known and well-respected company that has been owned by the family since it was founded. Although BKI is a successful company, the CEO is being challenged with the decision to implement a new capital structure that would be best for the family company. Currently, they have no debt. Only twice in the past has the firm borrowed a substantial amount of money; both times, BKI paid off the debt as quickly as possible. The plan being proposed is to use $209 million of cash and $50 million in new interest-bearing debt at the rate of 6.75% to repurchase 14 million shares at a price of $18.50 per share. Under the proposed capital structure change, the value of the firm would increase, which would also increase shareholders’ value. One measure of this improvement is EPS which is currently $0.91 (given in the case), but would jump to $1.34 ($60,570 EBIT divided by the number of new shares outstanding, 45,052), which is a 47.74% increase ([$1.34 - $0.91]/$0.91). Another benefit from the new capital structure plan is an increase in ROE from 0.11 ($53,630 net income divided by $488,363 shareholders’ equity) to 0.21 ($48,496 new net income divided by $229,363 new shareholders’ equity). With respect to the family ownership interest, the 10% stake in the company (which amounts to 5,905 shares [0.1 multiplied by 59,052 shares outstanding]) would rise to over 13% with the new plan (5,905 shares divided by 45,052 new shares outstanding). Even though Blaine is not used to borrowing, this plan does not seem too risky. A major factor of measuring risk is

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