blaine case

Another factor for management to consider would involve the clientele effects. Presently the Wrigley family controls 21% of common shares and 58% of Class B common stock. Assuming the Wrigley family do not sell any shares, the repurchase will raising their voting control from 46.6% to a majority control over voting rights at 50.6% (see appendix2.2). This isn’t deemed significant as the Wrigley family already previously possessed majority of voting rights

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

Hampton decided to buy back their stock because they were confronting many dissident stockholders at the moment. Besides, the company had always maintained a conservative financial policy. Having to spend 3 million on the repurchase affected their cash balance, as well as their payable accounts, that in turn it increases creditors and suppliers claims against the company.

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

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.

Repurchasing shares with a 40% debt to total capital ratio would increase shareholder value, however repurchasing shares with an 80% debt to total capital ratio would significantly decrease shareholder value and therefore would not be advisable. Increasing debt increases shareholder value to a certain point. As this proforma shows, the point of diminishing return is somewhere between 40% and 80%.

The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.

We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.

Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.

It seems then that companies should fully leverage the company or a least come close to doing so but there is a probability that the company enters financial distress as its leverage (D/E) increases. Financial distress can be very costly for companies, and the cost for this scenario is shown in the current market value of the levered firm's securities. Investors factor the potential for future distress into their assessment of the present value (this is where PV of distress costs is subtracted from un-levered company value and the PV of the tax-shield.) The value for the costs

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

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

In summary we recommend the share buy-back plan, as it will increase the value of the firm, shield part of income from taxes, increase return on equity and lowers agency cost. The increase in value of the firm and lower cash in hand also makes the firm less attractive target of a take-over.

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

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).