Vous êtes sur la page 1sur 8

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 1. The company's asset base will
2. Increase leverage - invest in its decrease – it would have to borrow
business without increasing money if it wants to acquire
shareholders' equity another company or expand its
3. Deliver better return on equity production
4. Increased control for family 2. Increasing long-term debt may
members - reversing downward cause financial distress - larger
trend from IPO. portion of its EBIT is used to pay for
5. More flexibility in setting future interest expenses.
dividends per share 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