Evaluation on Share Repurchase Proposal of Blaine Kitchenware Inc.

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Evaluation on Share Repurchase Proposal of Blaine Kitchenware Inc. Group 7 Contents Executive Summary 3 Overview of problems 3 Analysis on Capital Structure & Payout Policies of Blaine 3 1. Inappropriate current capital structure and payout policies 3 2. Advantages and disadvantages of large share repurchase proposal 4 a. Effects of share repurchase on assets, liabilities and equity on balance sheet 5 b. Effects of share repurchase on debt ratios and interest coverage ratio 5 c. Effects of share repurchase on Earnings Per Share and Return On Equity 5 d. Bonus question—effects on wacc 6 4. Effects of the proposed share repurchase on shareholders 6 Appendix 7 Executive Summary The main problem faced by BKI is over liquidity and…show more content…
First, current payout policies directly increase payout ratio by issuing large amount of new shares. High payout ratio shows that the company has to spare a large amount of cash to pay dividends rather than invest in more profitable projects. In addition, given that dividends per share climbed slightly, earnings per share dropped greatly from 1.29 to 0.91, meaning current payout policies limit the value of shareholders. Although riskier, debt financing helps company have a better financial structure and because Blaine Kitchenware refuses to do so, we agree that their capital structure and pay out policies are not the most appropriate for the firm. 2. Advantages and disadvantages of large share repurchase proposal The large share repurchase should be recommended to Blaine’s board. The followings are advantages of share repurchase. First, a large share repurchase will significantly increase shareholders’ percentage ownership of BKI. BKI has been under levered for decades. The company acquisitions of several small manufacturers made shareholders’ equity be diluted even more. In other words, shareholders, especially the main shareholders in Blaine’s board, are paying for BKI’s over-liquidity. This share repurchase will not only give the board more flexibility to allot dividends, but will lead to a stable development of BKI’s business in the long run. In addition, practically, conducting a large share repurchase by

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