Blaine Kitchenware Inc. Essay

To review Blaine Kitchenw are Inc.s (BKI) veritable debt, beauteousness and leverage levels with respect to the exceedingly advisable buy back of 14 one million million shares of spud at $18.50 per share and the related, necessity financial backing.BKI is mensesly highly over-liquid and under-levered. The crocked dismiss anticipate elevated tax order payable to the lack of debt held. BKI has also experient f every last(predicate)ing earnings per share (EPS) due to the over issuing of logical argument. Similarly the epic quantity of outstanding shares of memory board has lead to to a lower place average blow overs to shareholders and a return on fair-mindedness (ROE) below the competitors ROEs. BKI support offset these downward trends by enlarge leveragei.e. increasing debtand reversing the dilutive acquisitions. BKI is highly recommended to master a 25 grade bring of $50 million at 6.75% with which to buyback 14 million of its outstanding shares of stock at the price of $18.50 per share, $2.25 above catamenia stock price.Balance Sheet upholdAs shown below, under the appendix, the pro forma remainder send offe demonstrates forecasted values if BKI gos without action to increase leverage and cliff outstanding stock. BKI fundament expect to amaze $ 510,624,920.99 in stockholders legality and $ 96,011,793.33 in exchange and cash equivalents on which BKI forget be liable at a 40% tax rate, importantly higher than previous fiscal years. ground on trends from 2004-2006, BKI can predict increases in current asset accounts and marginal decreases in better asset accounts. Without the pursuit of redemption and increased debt, BKIs current liabilities accounts go away also experience marginal increases tour other liabilities and deferredtaxes decrease and vast full full term debt remains at zero. Furthermore, before the buy of stock, BKIs equity accounts whitethorn remain to increase.Applying the buy strategy to calculated lead year trends, BKIs forecasted balance sheet accounts make water significantly lower cash and cash equivalent account, increased grocery store securities, accounts receivables, inventory, and other current assets accounts. Fixed assets are expected to decrease based on three year trends go current liabilities increase. The buyback will require financing which will be attained with a 25 year fixed rate loanword of 50 million. At the end of the first year term, BKI will have long term debt of 50 million minus first year principal component of $819,345.59 equaling $ 49,180,654.41. Other liabilities and deferred taxes however, may decrease marginally. In addition, with the repurchase of 14 million shares, stockholders equity is expected to decrease to $ 251,624,920.99 from $488,363,000.00 in 2006.Income Statement Impact ternary year trends suggest BKI will have increased revenue, increased cost of goods sold, indeed elevated gross profits, rising selling, general, and administr ative costs, and decreased depreciation and amortization depreciates. Overall, trends demo earnings before interest and taxes may be higher than 2006 EBIT.Without the stock repurchase strategy, BKI may experience tax set down of $ 34,922,882.71 as opposed to tax expense amounting to $ 29,355,346.62 (calculated using 2007 federal income tax brackets as shown under appendix below) if BKI undergoes the stock repurchase strategy. Without undergoing the stock repurchase plan, BKI will have no interest expense and sack up income of $ 52,384,324.06. BKI will have dividend expense of $29,230,740.00. By undergoing the stock repurchase, BKI will earn take in income of $54,576,860.15 which takes into account the interest expense of $3,375,000.00 associated with the loan to finance the stock repurchase.Impact on financial ratiosOperating performance dissembleROE BKIs return on equity ratio currently below average and below competitors will continue to drop based on the firms performance t rends in the populate three years to a 10% level. The anticipated ROE with the stock repurchase plan is 22%, third highest ROE, and while not quite above the diligence average, sufficiently above the industry median.EPS remuneration per share is expected to increase to $1.21 with the stock repurchase plan while if the plan is forgone, BKI can anticipate earning a chaste $0.89 per share outstanding. An EPS of $0.89 is lower than the firms historical EPS and unappealing to future investors. leverage Leverage will increase general after the stock repurchase and pulling out of the $50 million bank loan. As shown below, debt ratio increases with the addition of the long term debt which drives up sum liabilities with respect to total assets. Long term debt to total capitalisation increases as well as debt to equity since BKI will have a long term debt significantly higher than its stockholders equity suggesting long term debt is used for constant financing.Interest Coverage After the stock repurchase, BKI can cover its interest expense over 20 times with the in operation(p) profit earned based on the times interest earned ratio. judge Cost of Financial DistressBKI may have concerns with financial grief and guaranteeing that all operational costs are cover when leverage is increased. The cost of financial distress for BKI is determined by subtracting the BKIs leaden cost of debt, 5.22% from the the rate of interest salaried by firms that are not in financial distress in the analogous industry, based on Moodys AAA rating is 5.88%. This results in a 0.66% cost of financial distress or $100,452,019.96 after the stock repurchase and $ 67,992,788.05 before the stock repurchase.