Blaine Kitchenware

1766 WordsAug 25, 20128 Pages
BLAINE KITCHENWARE INC. Blaine Kitchenware was a mid-sized producer of small appliances primarily used in residential kitchens. By 2006, the company’s products consisted of a wide range of small kitchen appliances including deep fryers, griddles, toasters, ovens etc. Blaine had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the period 2003 to 2006, the industry posted modest annual unit sales growth of 2%. In 2006, 65% of its revenue was generated from shipments to U.S. wholesalers and retailers. The company shipped approximately 14 million units a year. There were three major segments in the small kitchen appliance industry: food preparation appliances, cooking and beverage making appliances but…show more content…
Thus, the returns to shareholders are lower from the industry average. Blaine is an over-liquid and under-levered company and its shareholders are paying a price for it. It would not be rational for a public company to be funded only by equity. It 's too inefficient. In 2006, the company Return on Equity (ROE) was 11%, which is below the industry average of 19.5%. Also the increasing trend in BKI’s payout ratio was unsustainable Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money. In addition, the company can deduct the interest paid on the debt from their income and thus reduce the tax burden. With an increase of future corporate tax from 30.8% to 40%, it would be beneficial for the firm to deduct interest payments to pay fewer taxes. Debt greatly reduces the role of integrated enterprise cost of capital. Therefore, it can increase earnings per share and its stock value by improving the proportion of corporate debt appropriately, which assumes a crucial role of financial leverage. Enterprises financial leverage of funds has a magnifying affect, when the business uses the liabilities, the effects of financial leverage will show. However, debt is not always excellent, and we should firstly analyze whether the profitability of raising the funds for capital is greater than the interest rate. If it is so the use of debt will substantially increase their

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