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Blaine Kitchenware - Assignment

Seminar in Corporate Finance (Temple University)

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Blaine Kitchenware: $325m Stock Repurchase Program

FIN 4596-002
Professor Tilan Tang
March 26, 2018
Dillon Patel
Matthew Mulligan
Aesha Patel
Hanan Shandler

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Blaine Kitchenware (BKI) is not using its assets efficiently because it is not using its cash on hand to

reinvest back into the company and is only financing itself through equity. As a result, it is over liquid and

unlevered, running the risk of declining purchasing power and losing potential returns from investing its cash. A

stock repurchase program is necessary as it will increase the overall value of the firm, increase ROE, increase

the family’s ownership, and decrease WACC. The accrued interest expense can be deducted providing a needed

tax shield. Blaine Kitchenware should consider a $325m stock repurchase program, contributing $209m in cash

and issuing $116m 10-year bank term loan.

BKI’s previous acquisition growth strategy has diluted shareholder value and decreased retained

earnings by 27% over the previous three years due to increased dividend payout. A share repurchase would

restore previous plowback ratio, while maintaining and growing dividend per share. Blaine is not financially

distressed. It has adequate cash on hand and solid cash flows to support the immediate repurchase and interest

payments. With the debt financing, it can increase retained earnings by more than $1m per year. Interest and

debt coverage ratios can stay within peer group averages.

BKI’s absence of leverage has subsequently exposed the firm to higher tax expense. Utilizing the tax

shield opportunities presented with debt financings will positively impact EPS and retained earning

opportunities. The cost of capital moving forward can be maintained while also maintaining an equity beta

below its peer group average. Assuming a stable P/E ratio, a repurchase would increase share price more than

23%. In contrast, if BKI does nothing, share price will decrease 0.33% in 2007. BKI will experience a 62%

decrease in current assets and a 35% decrease in total assets because of a repurchase with liabilities increasing

from new debt. The reduction in cash will prohibit any immediate acquisition opportunities which is of concern

considering historical growth opportunities.

BKI’s financial health would benefit from a share repurchase by decreasing taxable income, therefore

holding the firm within its current tax bracket (Exhibit 2). It will also increase retained earnings by $1m in 2007.

Shareholders benefit from an increased share price. It allows for potential dividends increases in the future. The

reduction in dividends paid more than compensates for annual interest expense while increasing family

ownership and driving ROE within peer group average as seen in Exhibit 1. The repurchase also signals to the

market that the firm has stable cash flows, thus creating the potential for an undervalued stock and a possible

increase in share prices. With growth projected in the industry BKI has a bright future if it repurchases shares.

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Appendix

Exhibit 1)

Exhibit 2)

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