Blaine Kitchenware is issuing stock to raise money for their business. BKI plans repurchase its own shares. This means BKI plans to invest into its own company. The company’s main issue is the fact that it is over liquid and under-levered and whether to distribute cash to shareholders by buying back shares or paying dividends. The answer is easy as this; BKI has to spend money to make money. Lucky for them they have the money and have more than enough to invest into their company. When BKI repurchase their shares they are sending the message that their stock price is affordable. Only BKI will know how much the company is worth. This leads to a decrease in the number of shares outstanding in the market. BKI is looking for improvements in…show more content… This being said the remaining number of shares after buyback would now equal 62% of 59,052 million shares, which would be 36,612 million shares.
Debt to be raised:
Number of shares to be repurchased = 22,439 million
Total price of the shares to be repurchased = 22,439 x $18.50 = 415,121
Less cash and cash equivalents = 257,497
Debt to be raised for buyback = 415,121 – 257,497 = 157,624 @ 6.75%
EPS:
Interest to be paid = 6.75% of 157,624 = $ 10,639
EBIT = 63,946
Less loss of cash and cash equivalants and market securities at 4.92% = 11,358
Revised EBIT = 52,588
Less interest @ 6.75% = 10,639
Earnings before taxes = 41,949
Less taxes = 23,821
Net Income = 18,128
EPS = 18,128 ÷ 36,612 = $ 0.49
Expected market price = 0.49 x 17.86 = 8.75
Price of shares to be bought back = $ 415,121 ÷ 59,052 = $ 7.029
Decrease in value per share = $ 16.25 – 8.75 = 7.50
ROE = 18,128 ÷ 257,497 = 7.04%
We can safely say that the best option for BKI is to go for a complete buy back of