Q1

Are Blaine’s current capital structure and layout

policies appropriate?
Introduction (Contd.)
• ROE levels were disturbingly low at 11%
• partly due to dilutive acquisitions
• Very conservative w.r.t to outside borrowings
• Dividend payout and Capex were small enough to be funded by
the operating cash flows
• Current levels of dividend payout are unsustainable
• leading to lower cash for reinvestment
• Shareholders not satisfied with marginal increase in dividend
• Stock price at all-time high; share repurchase plan is a
tough decision
• Killing of war chest for acquisition
• Future need for debt becomes more real
• Growth without acquisition seemed difficult; organic growth
expectation of only 3%
Introduction
• Recent development is consolidation in a fragmented
industry
• Acquisitions of BKI were done through cash and
company stock
• Margins dropped in the last three years despite
launch of high-end products
• Integration costs and inventory write downs for their
recent acquisitions
• Imports and private labels caused the industry to
lower prices to maintain sales growth, but Blaine did
not follow
• Growth in top line thus was attributable to recent
acquisitions
Q1
• Appropriate is a very subjective term; however, the
company is over-liquid and under-leveraged
• Changing times, where topline growth, ROE and size
matters more
• Leverage is an important tool to increase ROI and
ROE, which needs to be used by Blaine
• Funding everything by high-cost low-risk equity
• makes the investments less attractive
• but more secure
• A portion of Capex and acquisitions should be funded
with debt
• maximise return on equity
Q1
• Debt has a lower cost of capital
• further enhanced by the tax shield it receives on the interest
payment
• has higher risk, as interest receives highest priority in Cash flows
• Industry average net-debt-to-equity ratio is about 17% while
Blaine is at about (24%)
• Only equity funding it is further destroying ROE for its
shareholders
• little incentive to stay with a company that has lowest ROE
• further risk of diluting it
• Cash management is also an important issue when having
huge cash and marketable securities
• End up investing in less-profitable projects
• Cost efficiency receives lower priority
• Idle Cash reduces value of the company
 Q2

Should Dubinski recommend a large share

repurchase to Blaine’s board? What are primary
advantages and disadvantages of such a move?
Dubinski can recommend a large share repurchase to
the board using cash and cash equivalents and raising
some debt.
Advantages Disadvantages

1. Debt has a lower cost of capital
2. Increase leverage - invest in its
business without increasing
shareholders' equity
3. Deliver better return on equity
4. Increased control for family
members - reversing downward
trend from IPO.
5. More flexibility in setting future
dividends per share
1. The company's asset base will
decrease – it would have to borrow
money if it wants to acquire
another company or expand its
production
2. Increasing long-term debt may
cause financial distress - larger
portion of its EBIT is used to pay for
interest expenses.
3. Loss of control for smaller
shareholders as family ownership
rises to 81%
4. Volume is reduced- reducing
liquidity of the stock is reduced in
the secondary markets