Blaine Kitchenware

Blaine Kitchenware, Inc.: optimal capital structure

For this case study you will take on the role of the investment banker introduced at the beginning of the case study. A week following your first meeting with Mr. Dubinski, he has called to request your assistance with the analysis of a stock repurchase. He has operational experience, but little financial management experience. As a result, he needs your help convincing his board of directors that the stock repurchase is a good idea. The board is more financially conservative than Mr. Dubinski. Mr. Dubinski wants you to evaluate a scenario where Blaine Kitchenware, Inc. (BKI) will repurchase 14 million shares at $18. 50 per share. To do so, BKI will borrow $50 million at an interest rate of 6. 75%. Consider the following questions that are likely to be raised regarding the analysis: What effect does the proposal have on the balance sheet? How is operating performance impacted? How are earnings per share and ROE impacted? How is leverage affected? How is interest coverage affected?

What is the expected cost of financial distress? How is the cost of capital impacted? What happens to the family control of the business?

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For this assignment you should write a memo to the board of directors. None of these directors are well versed in finance and all are skeptical of using debt. Space dedicated to explaining leverage concepts in layperson terms and the calculations involved will prove to be very relevant and well received. Board members are also looking for advanced analysis with evidence of critical thinking, particularly as it regards optimal capital structure.

They always appreciate well written memos that make appropriate use of correct grammar and spelling. They are also very busy running their own corporations, so memos written in a concise manner are better received. However, as stated in Keys to Successful Case Studies: Write-up Tips, “if you have just one page of analysis, I will not read it. You will earn a zero”. While your memo should be concise, it should also contain a detailed appendix of your calculations. The course website will only allow you to submit one document. Thus, you will need to “insert” your Excel tables as objects” in your word document before uploading your write-up to the course website. I must receive both a hardcopy and electronic version submitted through the course website by 2:00pm on the due date. Otherwise, the write-up is considered late and will not be graded.

Extra Credit Opportunity

I will grade the assignments. Then I will go back through the assignments and award an additional 5 points (essentially half a letter grade) to any memo that properly references at least two relevant Harvard Business Review articles and/or Wall Street Journal articles. See the attachment for the grading rubric.

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