Blaine Kitchenware, Inc.: Capital Structure Harvard Case Solution & Analysis

Blaine Kitchenware, Inc.: Capital Structure Case Study Solution

Decrease in Share Price:

Another major cost that the Blaine Inc. could face is the decrease in its share price. It could be seen that the company’s shares were highly priced in the stock market despite of the low ROE and a low annual compounded rate of return on shares. The major reasons behind this is the capital structure of the company with no debt and a highly liquid position. However, the incorporation of debt in the capital structure could hurt the company’s position in the stock market and reduce the share price of the company. However, utilization of the debt in stock repurchase would compensate the losses and result in increasing returns for shareholders. (Brigham, 2016)

Costs of Financial Distress before the Stock Repurchase

The costs of financial distress faced by the company before the stock repurchase include the low ROE i.e. 11% as compared to a men ROE of 25% of the peers in the industry. Moreover, another financial distress faced by the company is low annual compound rate of return on shares i.e. 11% greater than industry but less than the peers i.e. 16%. Along with it, low dividend per share i.e. $1.07 despite of increasing payout ratio is also one of the financial distresses faced by the company.

Changes in Financial Metrics after Stock Repurchase and Leverage

However, all of these financial costs could be altered by incorporating debt in the capital structure and repurchasing stocks. A table showing the comparison of various financial metrics before and after the SR and leverage is given in the Appendix 4.

It could be seen from Appendix 4 that the dividend per share with SR and debt are higher than the dividends without SR and Debt. Moreover, the compound annual rate of returns on stocks with SR and debt are also higher than the rate of returns without SR and debt. Moreover, the company could provide a rate of return of 16% at the end of the 5th year that is equals to the rate of return provided by its peers. Along with it, the ROE in case of SR and leverage is also high i.e. 18% as compared to an average ROE of approximately 11% without SR and debt.

Conclusion

Although, the incorporation of debt in the capital structure could bring certain challenges for the company as it tends to decrease the company’s credit rating in the market, negative impact on the stock market position of the company, but, the major problems faced by the company including the low ROE, low annual compound rate of return on stocks, low dividend per share could be resolved by acquiring debt and using the amount of debt and the cash available to repurchase the stocks.

 

Appendices

Appendix-1: Blaine Kitchenware, Inc. Income Statement (With Interest)

Blaine Kitchenware, Inc. Pro-forma Income Statement (in 000s of dollars) (with Interest)
  Actual Projected
  0 1 2 3 4 5
Revenue 346,336 369231 393641 419663 447406 476983
Less:  Cost of Goods Sold 249,794 266307 283912 302681 322691 344023
Gross Profit 96,572 102924 109728 116982 124716 132960
Less:  Selling, General & Administrative 28,512 30397 32406 34549 36833 39267
EBIT 68,060 72527 77322 82434 87883 93693
Interest Expense 0 3,375 3,128 2,864 2,582 2,282
EBT 68,060 69152 74194 79570 85301 91411
Taxes 23,821 24203 27063 28852 30759 32792
Tax rate 35% 35% 35% 35% 35% 35%
Net Income 44,239 44949 47131 50718 54542 58619

Appendix-2: Blaine Kitchenware, Inc. Income Statement (With SR)

Blaine Kitchenware, Inc. Pro-forma Balance Sheet (in 000s of dollars) (with SR)
  Actual Projected
  0 1 2 3 4 5
Assets:
Cash 230866 34353 47377 61426 76567 92872
Other Assets 257497 257497 257497 257497 257497 257497
Treasury Stock 259000 259000 259000 259000 259000
Total Assets 488363 550850 563874 577923 593064 609369
Liabilities and Equities:
Debt 0 46338 42429 38256 33802 29047
Equity 488363 504512 521445 539667 559262 580323
Total Liabilities and Equities 488363 550850 563874 577923 593064 609369

Appendix-3: Dividend Analysis

Appendix-4: Financial Performance With and Without Stock Repurchase and Leverage

Comparison of Financials Before and After Stock Repurchase Leverage
Year 1 2 3 4 5
Dividend Per Share
Without SR 1.14 1.22 1.30 1.39 1.48
With SR 2.32 2.44 2.62 2.82 3.03
Annual Return On Share
Without SR 6% 7% 7% 7% 8%
With SR 13% 13% 14% 15% 16%
ROE
Without SR 9% 10% 10% 11% 12%
With SR 18% 18% 18% 18% 18%
Operating Cash Flows
Without SR 44,239 47,143 50,259 53,582 57,124
With SR 47,143 50,259 53,582 57,124 60,900

 

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.

Share This

SALE SALE

Save Up To

30%

IN ONLINE CASE STUDY

FOR FREE CASES AND PROJECTS INCLUDING EXCITING DEALS PLEASE REGISTER YOURSELF !!

Register now and save up to 30%.