1. Consider the following share repurchase
proposal: Blaine will use $209 million of cash
from its balance sheet and $50 million in new
debt-bearing interest at the rate of 6.75% to
repurchase 14.0 million shares at a price of $18.50
per share.
•
•
Calculate the present value of the interest tax shield
associated with the new level of debt.
If we consider cash as negative debt, what is the actual change
in debt? What would be the present value of the interest tax
shield associated with this level of debt?
1
Marginal Tax Rate
Market Risk Premium
10-year Treasury
2. Use the information given
here to answer the next set of
questions
Debt Relationships
FY 2006 EBIT
Interest Expense
Coverage Ratio
Estimated Cost of Debt
Implied Debt
AAA
73,860
4765
15.5x
?
?
AA73,860
6423
11.5x
?
?
Interest
Coverage
Ratio
> 13.0
9.5 - 12.0
7.0 - 9.5
5.0 - 7.0
4.0 - 5.0
2.5 - 4.0
A
73,860
8028
9.2x
?
?
BBB+
73,860
10551
7.0x
?
?
40%
5%
5.02%
Debt
Default
Rating
Spread
AAA
0.65%
AA0.80%
A
0.85%
BBB+
1.83%
BB
2.98%
B+
4.10%
BB
73,860
14069
5.3x
?
?
B+
73,860
17420
4.2x
?
?
2
For each credit rating
a.
b.
c.
d.
e.
f.
g.
h.
Estimate the cost of debt associated
Estimate the dollar amount of debt
Estimate D/E and D/V
Estimate the (re)levered beta
Calculate the cost of equity
Calculate the cost of debt
Calculate the WACC
Calculate the value of the firm
3
3. Give a summary recommendation for BKI.
At minimum, the recommendation should
contain
•
•
•
•
The recommended level of debt, and why this
would be advantageous for the company.
The total amount of shares to be repurchased.
The new capital structure.
The new cost of equity, cost of debt, and WACC.
4