Currently Blaine has an inappropriate capital structure that negatively affects shareholders in multiple ways. The current large cash position is lowering returns to existing shareholders and should be used in a way that creates value. In addition, debt would create both tax benefits and added discipline for management. Evidence of the drag the currently placed on returns is seen when analyzing company performance. Despite having the strongest EBITDA margin among its peers Blaine still lags in most financial indicators. For example, ROE currently sits at 11% significant below current industry median of 19.5%. Introduction of debt of use of the large accumulated sums of capital would help raise the ROE above its current level.
Share repurchases represent an attractive opportunity for Blaine to use its cash to create value for shareholders. Some potential downsides of this initiative would be the crowding out of attractive investment opportunities for cash. Such acquisitions could also signal the market that Blaine lacks attractive investment opportunities for its cash. However, given Blaine’s large stockpile this seems unlikely, as cash is not being utilized currently. Stock repurchases would have a number of benefits for the organization. It will serve to boost dividends, EPS and stock price while creating a more attractive capital structure.
Net Income Adjustment: Previous EBT: $77,451 Less Interest Expense: ($50mln*0.0675): $3,373 Taxes (30.7%: $23,821/77451): $22,741 Net Income: $51,337
EPS= Net Income/ Shares Outstanding
EPS=$51,337/(59,052-14,000)
EPS= 1.132
The share repurchase would cause 2006 EPS to rise from $0.91 to $1.13.
Book Value Of Equity=$488,363-$259,000
Book Value Per Share=229,363/45,052 shares = 5.10
62% of total outstanding shares = 36,612,00
After Repurchase Ownership = 36,612/45,052 = 81%
Debt to Equity
D/E = 50,000/229,363
D/E = 0.2179
As shown in the calculations above, the share repurchase is a viable option for both the firm and the Dubinski family. Shareholders would benefit from the increase in EPS of roughly 24% after the repurchase. Another
