Blaine Kitchenware Case Analysis

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In order to buy back their shares BKI has a couple of options (see Table 3 in Appendix):

- Use only the cash and securities without taking on any debt

- Use only debt to buy back a portion of shares the family does not own and leave all cash and securities untouched

- Use only debt to buy back all of shares the family does not own and leave all cash and securities untouched

- Use a combination of cash, securities, and debt to buy back a portion of shares the family does not own

- Use a combination of cash, securities, and debt to buy back all of shares the family does not own

These 5 different scenarios are understandably not the only options for Blaine Kitchenware, Inc., but they give a decent representation of would could happen if BKI were to choose one of these paths or something similar. The tables showing the outcomes of each of these options are in the Appendix. Table 1 is the pro-forma Income Statement, and Table 2 is the pro-forma Balance sheet. Both tables have each individual option and their outcomes.

To summarize these outcomes the first thing is to eliminate the option of using only the cash and securities. The example shown used all cash and securities available at the end of 2006 as an exaggeration to show the outcomes more juristically. The outcome of this option results in a liquidity that is much too low especially considering BKI’s desire to be conservative. Therefore, this is not a good option for the company to effectively correct the capital structure issues.

The next scenarios to take a look at are the option to do a complete buy back with either all debt or a combination of debt and cash and securities. Looking at these results they have some noticeable similarities. Both of these options gives the family shareholders 100% of the outstanding shares giving them much more control of the company, which may be good for the shareholders but causes other issues with the capital structure. One problem being, the effect on the ROE ratio for both options compared to the mean of the industry. The company’s ROE ratio in 2006 was below average at 11% so BKI should find an option to increase this percent. However, the both of the complete buy back options increases the ROE ratio far beyond the industry mean. The ratios both rose to approximately 65% with the industry mean being only 25.9% these options do not look to be a good option in correcting Blaine Kitchenware’s capital structure.

The partial buyback using debt only seems to be a good option for BKI. This option can appeal to the conservative nature of BKI because it allows for the company to keep all of their cash and securities from 2006. This option would also increase the company’s ROE ratio closer to the industry average. What is less obvious is understanding the downfall of only using debt to buy back shares of stock. By only using stock the company is continuing to increase their cash and security accounts by very large amounts. This may seem like a good thing but with BKI being at a high risk for a hostile takeover this option would only make that risk that much worse. This would also not help the company’s overall capital structure; it would do just the opposite. Increasing the cash and security account by such a large amount without taking on any debt makes the company even more liquid than it already is.

In conclusion of the results, the best option for Blaine Kitchenware, Inc. is the partial buyback using their cash and securities along with a long term loan. This option proves to be the best scenario due to the positive effects on BKI’s capital structure. This option increases EPS, decreases the dividends per share, gives the family 85.7% of the total equity, increases the ROE to the median of the industry, increases the company’s return on assets, decreases the after tax operating cash flow much closer to the industry average, and decreases the liquidity of the company. Each one of these outcome has a positive effect on the capital structure of Blaine Kitchenware. The increase in earnings per share and the total equity percentage makes the shareholders happy. The return on equity has a significant increase that could continue in the following years to reach the industry mean. An increase in the return on assets is very good because it measures the strengths and weaknesses of the company. The first part of this equation tells the analyst how efficiently a company uses its assets to produce profits. The second part of this equation tells the analyst how working capital and long-term, income-producing assets are used to help maintain the company's operation. The advantage of this model is that it uses information from both the balance sheet and income statement, which gives the analyst a thorough view of a company's financial health and operating efficiency. Industry average of the after-tax operating cash flow is $46,337 with this option the company’s after-tax operating cash flow dropped from $50,039 down to $44,229. This shows that the capital structure of BKI is moving much closer to the industry’s average and towards a more efficient structure of their cost of capital.

This scenario greatly improves the capital structure of Blaine Kitchenware, Inc., and in the long run will continue to help keep a healthy position in the industry. Along with an improved capital structure, this option will immensely decrease the threat of a hostile buyout because the company is no longer over liquid. It will allow for the company to focus on competing with imports and private label products, because they have a much more effecting rate of return on assets helping them to feel comfortable lowering prices and entering the beverage appliance segment. It will also correct the issues with the structure of their dividend policy, because by increasing the value of the shareholders stock they make the shareholders happy and can correct their dividend payout ratio by bringing it down to 35% because a growth company is not required to pay any dividends.

Conclusions

In order to make an analytic decision of the company’s financial structure the current capital structure and payout policies of BKI need to be addressed. Because the current approach of the management is to lower the risk BKI has operated the firm almost completely debt free, which has put them in the position of having an inefficient capital structure. Due to their conservative way of operating they have not considered the option to help lower their cost of capital as a result of reduced taxation. Because of this they have

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