Blaine Kitchenware is issuing stock to raise money for their business. BKI plans
repurchase its own shares. This means BKI plans to invest into its own company. The company’s
main issue is the fact that it is over liquid and under-levered and whether to distribute cash to
shareholders by buying back shares or paying dividends. The answer is easy as this; BKI has to
spend money to make money. Lucky for them they have the money and have more than enough
to invest into their company. When BKI repurchase their shares they are sending the message
that their stock price is affordable. Only BKI will know how much the company is worth. This
leads to a decrease in the number of shares outstanding in the market. BKI is looking for
improvements in liquidity of shares and enhancement of the shareholder wealth
Profit earned by BKI can be used by rewarding shareholders in the form of dividends and
capital expenditures. In recent years the company’s largest uses of cash had been common
dividends. Dividends per share had risen only modestly during the years 2004, 2005 and 2006.
The average capital expenditures during the past three years were just over $10 million per year.
BKI would go into buy back because they have unused cash and their share valuation should be
higher. Because BKI has excess cash and not many other projects to invest into, it is better for
them just to reinvest in what they already have. Buyback of shares is mostly done at a higher
price than the current market price of the stock. So on numerous occasions, BIK, by buying their
own shares at a price higher than prevailing market price, company signals to the market that
its share valuation should be higher.
From what we have gathered, there are many advantages of the buying back of shares.
Some advantages are increase confidence in management, enhances share value, high share
price, reduce takeover chances, increases ROE, psychological effect and excellent tool for
financial reengineering.
There are many reasons why a company would do a buyback of shares. One of the main
reasons why a company would buy back their shares is if they have excess amounts of cash. If a
company believes their share price is undervalued, they will do a buy back in hopes of raising the
share price. Another reason is that since dividends are always taxed at a higher rate than capital
gains, companies will often prefer to do a buyback for their shareholders, rather than distribute
dividends. Also, companies often do a share buyback if they plan on leaving the country or if
they want to close the company.
When deciding whether to repurchase shares or not, we consider three of the following
scenarios:
1. BKI should not do any type of buyback.
2. BKI should only do a partial repurchase of shares.
3. BKI should do an entire buyback of shares.
Each option will be looked at thoroughly in the following calculations.
Option 1
(In Millions)
Number of shares: 59,052
Net Income: 53,630
Therefore EPS = Net Income ÷ Number of Shares
= 53,630 / 59,052
= 0.91 (Rounded)
Price per share = $16.25
Price to earnings ratio = Market Price ÷ EPS
= 16.25 / 0.91
= 17.86
ROE Calculation = Net Income ÷ Shareholder’s Equity
ROE = 53,630 / 488,363
= 11%
Option 2
(In Millions)
Total Cash & Cash Equivalents = 66,557
Marketable Securities = 164,309
Total amount available for buyback = 230,866
Number of Shares bought = 230,866 / 16.25
= 14,207
Therefore the number of shares remaining = 59,052 – 14,207
= 44,845
Calculation of EPS = Earnings per share ÷ total number of shares
The company could have invested in U.S. treasury securities so now we will have to account for
the loss in interest earnings had it invested in those securities. This interest rate is calculated by
averaging out all the yields on U.S. treasury securities provided in Exhibit 4 which equals 4.92%.
This means net earnings now equals: 53,630 – (4.92% x 230,866)
= 53,630 – 11,359
= 42,271
EPS now equals: 42,271 ÷ 44,845
= $ 0.94
Now the expected market price of the share would be: Expected EPS x P/E ratio
Expected Market Price = 0.94 x 17.86 = $16.79
Increase in value per share: 16.79 – 16.25 = $ 0.54
Money spent on buyback = 230,866 ÷ 59,052 = $ 3.91 (per share)
ROE:
Net Income = 42,271
Shareholders Equity = 488,363 - 230,866
= $ 257,497
ROE = 42,271 ÷ 257,497
= 16.42%
Option 3
Blaine needs to repurchase 38% of 59,052 million shares, which equals 22,439 million shares.
This being said the remaining number of shares after buyback would now equal 62% of 59,052
million shares, which would be 36,612 million shares.
Debt to be raised:
Number of shares to be repurchased = 22,439 million
Total price of the shares to be repurchased = 22,439 x $18.50
= 415,121
Less cash and cash equivalents
= 257,497
Debt to be raised for buyback
= 415,121 – 257,497
= 157,624 @ 6.75%
EPS:
Interest to be paid = 6.75% of 157,624
= $ 10,639
EBIT = 63,946
Less loss of cash and cash equivalants and market securities at 4.92% = 11,358
Revised EBIT = 52,588
Less interest @ 6.75% = 10,639
Earnings before taxes = 41,949
Less taxes = 23,821
Net Income = 18,128
EPS = 18,128 ÷ 36,612
= $ 0.49
Expected market price = 0.49 x 17.86
= 8.75
Price of shares to be bought back = $ 415,121 ÷ 59,052
= $ 7.029
Decrease in value per share = $ 16.25 – 8.75 = 7.50
ROE = 18,128 ÷ 257,497
= 7.04%
We can safely say that the best option for BKI is to go for a complete buy back of their
shares. For option one with no buy back, the scenario fails to create value for the shareholders
and will not be a great option for BKI. For option two, all the cash & cash securities plus the
market securities are used by the company to buy-back the shares. Since no debt is being raised,
it might find favor with BKI. Since the company, in comparison with its peers, has a low marketbeta – better thing for the stock-holders to do will be to sell the stock and invest in alternates.
The complete buy back method involves BKI in taking on debt. Family’s needs concerning the
dividend amount/growth can be better met through the complete buy back method. Since, debt is
being raised, the WACC will come down as cost of equity decreases. Therefore BKI should go
with the complete buy back method..
When it comes to the final question there are many reasons why it would be beneficial for
the Blaine Kitchenware Inc. to follow through with this transaction of repurchasing shares. One
of the big main reasons is that Blaine Kitchenware is sitting on a large sum of money and not
very sure how to reinvest it. With Blaine company sitting with below average ratio’s, it could
also resort to increasing the aesthetics of the company. Many people look at the growth of a
company as a large indicator of success but there is much more than that. Blaine Kitchenware
needed to do something to help increase their ROE and their earnings per share. With these
problems in Victor Dubinski mind, repurchasing shares was becoming more appealing. Before a
decision like this is made, it is vital to consider every party that will be affected from this
outcome. First we will look at the effects it would have upon the family members that are in
control and also large stake holders in the business. With the combine shares of the family, they
own sixty two percent of the business. With the consideration of a buy back the family members
would be pressuring for reacquisition of the market float of shares. By eliminating a portion of
the market float, each family member would be benefitted by this transaction. One biggest way
that this buy back benefits the family is the weight of their shares would increase along with their
ownership right. To explain this effect, if a member was to have 1000 shares of 10000, it would
mean that the member had ten percent ownership. When the buyback occurs, the company could
buy back 1000 shares. This now means that the member would own 1000 shares of 9000, which
would result in a 11.1 percent ownership. The other benefit of having this increase of control is
that the shareholders would also have increased dividend claims since their share percentage
increased. So with a buy back its easy to see why all the family shareholders would be interested.
As for the market float of investors that do not have control the buyback will have many
different effects on. Since it is a family based owned business an option to buyback could send
many signals to the other shareholders. This signal could suggest that Blaine Kitchenware are
either in some equity trouble that they need to use the buyback to help hide some of their ratios
or also that they are worried about a takeover. In this case though it is more towards the goal of
increasing their ratios and and investing some of the money that is held by their company. Some
of the shareholders may not be overly pleased with the fact that the company plans to take on
unnecessary debt to help finance the buy back. It is imperative that Blaine Kitchenware
maintains it debt to equity so that none of their debt agreements will fault. With this decision it
brings on large amounts of tax expense which can be seen as negative, since the company has
only taking on this form of debt twice in their history. Regardless of this, the shareholders of
Blaine will be for the buy back because of the increase to their share value and their dividend
payout. This will help the company get back on balance and increase each of the received value
of dividend payout to each shareholder. Overall it is easy to see why both the family
shareholders and the market float of shareholders would be interested in the partial buyback of
shares of Blaine Kitchenware. With the family getting more control and the shareholders getting
a potential increase of control and payout, it may be a good idea for Dubinski to follow through
with the idea.