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CASE II
Blaine Kitche enwar re, Inc.
.: Capital Str ucture r e
Grou up Mem mbers Shivam m Pitaria (3
336/50)
Tanuj j Madan (37
76/50)
Vinit Bansal (395/50)
Yuvraj S
Singh Bist (402/50)
Q1 ‐ Is Blaine’s capital structure appropriate? Give reasons.
Blaine’s capital structure is not appropriate because of several reasons. The biggest of them being not using debt financing. Without debt, Blaine is not realizing its true potential. The firm would actually need plenty of capital if it wants to continue on the path of growth and make required acquisitions and expansion.
Although with increasing debt, the risk also increases; but due
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Thus, it’s very important that Blaine repurchases some shares and lessen the dilution of ownership of the firm. This will help to improve the firm’s EPS and ROE as well. One of the disadvantages of share repurchase is that Blain might be overpaying for them.
The repurchase might be done at the point when the share price is near its historic maximum. Such a repurchase might not be considered optimal. Yet, the board should go with the repurchase, as the firm would be compensated by the tax deductible debt financing. Q3 ‐ Consider the following share re‐purchase scheme – use $209 million of available cash along with $50 million of 6.75% debt (payable annually) to repurchase 14 million shares @ $18.50 per share. Make a detailed assessment of this proposal, covering inter alia, Blaine’s EPS, ROI, interest coverage and debt ratio, cost of capital, and the family’s ownership interest. Investors and analysts might view the share repurchase as a positive move because of several reasons. Firstly, a buyback is seen as a move of confidence which usually leads to an increase in stock
price. Additionally, it would lead to an increase in the ownership for the shareholders. Going forward, it would also lead to an increase in EPS and ROE. A share re‐purchase scheme by using $209 million of
In the open market share repurchase, the firm may or may not declare the repurchase. Depending on the market condition and the firm’s position in the industry, the firm can decide when and how many
Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.
similar to that of share buyback, the number of new shares outstanding will reduce; thus,
5. a. A lower buy-back price means a lower stocking quantity, because it affects the cost of overstocking. Ralph wants to stock a lower quantity in order to lower his risk of overstocking. The optimal buy-back price is $0.75, which gives a stocking quantity of 659 and channel profits of $369.80.
The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.
A company with poor financial ratios and shady recent earnings results that announces a stock repurchase should be looked upon with much more trepidation. The next time you see a stock buyback announcement; take a close look at the company involved before making a final determination of what it may mean for the future of the stock.
We suggest that the company should take the option 3. Firstly, as mentioned in the above, the company requires $4.8 billion during 1984 and 1990 and option 3 can provide largest fund compared with option 1 and 2. Secondly, the option 3 incurs the least interest rate, 7.5%. Thirdly, even though the company needs to increase the debt ratio in the short run, they can adjust it later with the conversion option, which gives the company flexibility for capital
Hampton decided to buy back their stock because they were confronting many dissident stockholders at the moment. Besides, the company had always maintained a conservative financial policy. Having to spend 3 million on the repurchase affected their cash balance, as well as their payable accounts, that in turn it increases creditors and suppliers claims against the company.
* $75M is deducted from equity through the creation of treasury stock, which is a contra-equity account.
a) How many shares will the firm have to issue, assuming they issue the new shares at the current price per share?
Repurchasing shares with a 40% debt to total capital ratio would increase shareholder value, however repurchasing shares with an 80% debt to total capital ratio would significantly decrease shareholder value and therefore would not be advisable. Increasing debt increases shareholder value to a certain point. As this proforma shows, the point of diminishing return is somewhere between 40% and 80%.
Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.
* A broader capital base gives the company more access to credit which gives the company an option to venture into new business opportunities
Another factor for management to consider would involve the clientele effects. Presently the Wrigley family controls 21% of common shares and 58% of Class B common stock. Assuming the Wrigley family do not sell any shares, the repurchase will raising their voting control from 46.6% to a majority control over voting rights at 50.6% (see appendix2.2). This isn’t deemed significant as the Wrigley family already previously possessed majority of voting rights
The large share repurchase should be recommended to Blaine’s board. The followings are advantages of share repurchase.