Blaine Kitchenware Inc. Essay

To review Blaine Kitchenware Inc.s (BKI) current debt, impartiality and leverage levels with respect to the highly advisable buy of 14 gazillion theatrical roles of entrepot at $18.50 per share and the related, necessary financing.BKI is before long highly over-liquid and under-levered. The firm can anticipate elevated tax judge due to the lack of debt held. BKI has also experienced falling earnings per share (EPS) due to the over issuing of demarcation. Similarly the large quantity of cracking shares of stock has led to beneath average happens to shareholders and a return on equity (ROE) below the competitors ROEs. BKI can offset these downward tr odditys by increase leveragei.e. increasing debtand reversing the dilutive acquisitions. BKI is highly recommended to obtain a 25 form loan of $50 million at 6.75% with which to purchase 14 million of its large(p) shares of stock at the price of $18.50 per share, $2.25 preceding(prenominal) current stock price.Balance Sheet ImpactAs shown below, under the appendix, the pro forma symmetricalness sheet demonstrates forecasted values if BKI continues without action to increase leverage and decrease outstanding stock. BKI can expect to pay back $ 510,624,920.99 in stockholders equity and $ 96,011,793.33 in silver and cash equivalents on which BKI get out be liable at a 40% tax rate, significantly high than previous fiscal grades. found on trends from 2004-2006, BKI can predict increases in current asset marks and borderline decreases in fixed asset accounts. Without the pursuit of salvation and increased debt, BKIs current liabilities accounts will also experience marginal increases while separate liabilities and deferredtaxes decrease and long term debt remains at zero. Furthermore, before the repurchase of stock, BKIs equity accounts may continue to increase.Applying the repurchase strategy to deliberate three year trends, BKIs forecasted balance sheet accounts have significantly lower cash and cash equivalent account, increased market securities, accounts receivables, inventory, and early(a) current assets accounts. Fixed assets are expected to decrease base on three year trends while current liabilities increase. The repurchase will rent financing which will be attained through a 25 year fixed rate loan 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. former(a) 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 ImpactThree year trends suggest BKI will have increased revenue, increased cost of goods sold, therefore elevated gross profits, rising selling, general, and administrative costs, and decreased depreciation and amortization set downs. Overall, trends indicate earnings before provoke and taxes may be higher than 2006 EBIT.Without the stock repurchase strategy, BKI may experience tax expense 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 net income of $ 52,384,324.06. BKI will have dividend expense of $29,230,740.00. By undergoing the stock repurchase, BKI will earn net 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 dimensionsOperating performance impactROE BKIs return on equity ratio currently below average and below competitors will continue to drop based on the firms performance trends in the last 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 industry average, sufficiently above the industry median.EPS Earnings 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 genuine $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 overall after the stock repurchase and withdrawal of the $50 million bank loan. As shown below, debt ratio increases with the addition of the long term debt which drives up bring liabilities with respect to total assets. Long term debt to total capitalization 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 permanent financing. busy Coverage After the stock repurchase, BKI can cover its interest expense over 20 times with the operating profit earned based on the t imes interest earned ratio.Expected Cost of monetary DistressBKI may have concerns with financial suffering and guaranteeing that all operating(a) costs are covered when leverage is increased. The cost of financial incommode for BKI is determined by subtracting the BKIs weighted cost of debt, 5.22% from the the rate of interest paid by firms that are not in financial distress in the same industry, based on Moodys abdominal aortic aneurysm 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.