Blaine Kitchenware Case Solution
Review of capital structure and payout policies
From the following situation, it seems that the Blaine’s didn’t disclose the proper implementation of the definedpolicies because of the significant difference between debt and equity margin. The debt level is showing alack of information for the company’s valuation because it involved no interest paid debt in the balance sheet as well as its reflection in the income statement. Therefore, it shows that the company disclosed high earnings in the recent year.
Buyback affect Blaine
If Blaine would repurchase 14 million of shares, then it can be said that the cash balance (Liquidity) would decline in the balance sheet as well as the impact would show on the equity portion (similar to cash changes). On the other side, the net earnings would also increase by the addition of 50 million of interest paid debt. Therefore, the overall return on equity, earnings per share would decrease over time. In contrast to it, the debt ratio would be increased by reduction on the equity side. So, it shows that the overall financial results would be different from that of the actual scenario.
Perspective of controlling family to repurchase shares
As far as the net earnings would tend to decline, the overall returns of the controlling family would also decrease over time. Thus, it is an indication of conservative accounting, where the company would incur additional expenses on the current period in order to increase the future earnings. It is quite difficult for many analysts to predict the future outcomes of the company but the recent scenario shows that the company’s owners should implement the repurchase strategy in order to balance the debt and equity level and to improve the capital structure accordingly.
Perspective of other stockholders for repurchase strategy
Excluding the interest of controlling family, other stockholders should agree with the proposed strategy because it would allowincreasing the earnings per share by a reduction in the outstanding shares as well as an increase in the dividends. Thus, with the concept, it is concluded that all the stockholders and controlling family should consider the strategy to benefit for the long-term.
It clearly shows that if the earnings per share would tend to increase over time, then the dividend payments would also increase. Thus, the dividend payout ratio would grow by a decrease in the outstanding shares. Therefore, the company should accept the proposed strategy in order to satisfy its shareholders and their future considerations.
Recommendation for repurchase
From the analysis, it is recommended that Blaine should consider a large portion of share repurchase because it would allow managing the capital structure and financial policies of the company by balancing its debt and equity. The inclusion of debt would decrease the tax obligations and improve the earnings quality. The repurchase would also allow increasing the earnings per share as well as dividend payouts. Therefore, the company is still in profit so it should consider a repurchase strategy in order to improve the operations efficiently.....................................