The Impact Of A Share Repurchase Program For A Fictional Company

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We considered the impact of a share repurchase program for a fictional company – Blaine Kitchenware, Inc.
It was determined that the liquidation of $209 million in cash and marketable securities and the addition of $50 million in long-term would result in a capital structure which was reasonable and sustainable. Overall, tax expense would be lower, the value of the firm would increase and the riskiness of the company’s equity would edge just a touch higher.
From the perspective of both family and non-family shareholders, a share repurchase program is the right thing to do. The only possible objector to the proposal would likely be the U.S. Secretary of the Treasury.
Background information
Blaine Kitchenware, Inc. (BKI) is a publicly-traded, United States-based producer of residential kitchen small appliances (e.g. waffle irons, coffee makers, etc.). Relative to its average competitor in this marketspace, BKI has a strong EBITDA Profit Margin (22%, mean 18%) and Net Profit Margin (16%, mean 10%) but a much weaker ROE (11%, mean 25.9%). See Appendix A for a full financial comparison.
The company’s current and long-standing policy to remain completely unlevered in order to keep cash available for possible future acquisitions and eliminate the interest and fee expenses associated with debt financing. As of 12/31/06 BKI had a cash stockpile of $53.6 million and no net debt.
While the “appropriateness” of this policy may be debated, a few red flags have started to
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