blaine case

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.

By paying out excess cash and issuing debt, BBBY could improve return to equity holders and raise earnings per share (by a share repurchase).

What are the advantages of leveraging this company? The disadvantages? How would leveraging up affect the company’s taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

- A firm has a market value equal to its book value. Currently, the firm

Aside from the two aforementioned proposals the company can raise its leverage in other ways. By conducting DuPont analysis and understanding operating leverage we see that purchasing fixed assets and decreasing stockholder’s equity will raise the equity multiplier and the firm’s operating leverage. In this instance we recommend against this approach as the firm already has a large amount of excess cash above what they require to fund new positive NPV projects and purchase new assets. Investors would rather see their capital returned to them in the form of share repurchases and dividends as it is evident by the company’s cash stockpile that they can

An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.

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.

Pro-forma income statement and key credit rating determinants are shown in Exhibit 2 and 3 respectively. Remaining share no. of 158.3m after repurchase is based on proportional value addition distribution between cash-out and remaining shareholders and this number is inserted to calculate earning per share and corresponding immediate share price change after announcement of repurchase program. According to Exhibit 3 and industrial average of relevant grades, only fund flow/ total debt and total debt/ capital measures are not comparable with A credit rating. Considering EBIT and EBITDA interest coverage are two most important criteria and equity market value is so substantially different from book value which leads to a healthy

On the basis of risk and return, how does the increased leverage affect a company and the individual shareholder?

On the other hand, more debt does not affect the risk of the project under taken, but means less equity holders , these bring more risk to equity holders, the cost of equity increases with debt. assume Ra is the WACC without leverage.

The company also announced a plan to repurchase up to 20% of Deluxe Corporation’s stock, or 12 million shares. “At current prices, we believe the repurchase of

1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of these three elements is Eastboro management willing to vary, and which elements remain fixed as a matter of policy?

Special dividends: Special dividends have the advantage of not being sticky. This is a benefit as Torstar managers will be able to distribute excess cash to shareholders without financially constraining themselves in the future if cash flows decrease. Paying out a special dividend is a quick and easy way to optimize Torstar’s financial structure and does not constrain Torstar as much in the future. One down side of a special dividend is that it may signal that management is not confident about future cash flows and it does not mitigate agency costs as effectively as do regular dividends. According to DeAngelo et al (2000) the distinction between special dividends and regular dividends has been more vague the last years. It is evident that companies that pay small special dividends do so on a recurring basis and in a predictive manner. Thus, for Torstar to pay out a special dividend it is crucial for it to be substantially larger than the regular dividend in order not to make the investors believe it is a reoccurring event. Repurchases: Repurchases mitigates agency costs at Torstar by constraining them through less cash and cash equivalents. It will reduce non-value adding investments in the CESP segment and therefore mitigate the problem of overconfidence. The exiting shareholders will realize their capital gains which can be used for investing in other public “pure