The homework assignment is based on the discussion that took place in class on Thursday, October 12th. I would like your team to write t his up in a cooperative fashion. This ES should be written as a professional memo from Victor Dubinski to the Board of Directors. The ES should be one to 1.5 t o 2 p-a-g-e-s in length (1.5 spacing), plus supporting spreadsheet work. Thus, the total ES (including supporting spreadsheets) may be three to four pages (approximately). PLEASE make sure to format the entire ES (including spreadsheets) so it can be printed and read as a hard copy. I would prefer the ES be submitted as a single Word file, with spreadsheet work pasted in. I will, however, accept the spreadsheet work as a separate Excel file, just make sure to label the filename clearly.
The write up should address the key points of the questions we discussed during class discussion:
Do you think Blaine’s current capital structure and payout policies are appropriate? Why or why not?
Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move? Suppose the banker recommends that Blaine borrows $50 million at an interest rate of 6.75%, and use the loan proceeds plus $209 million of its cash and securities to purchase (in a self-tender) 14 million shares at $18.50/ share. Given just over 59 million shares outstanding and a current stock price of $16.25, the proposal involves paying a 13.8% premium to buy back 23.7% of the outstanding shares. What are the pros and cons of such an oﬀer from the perspective of Blaine, and thus Victor?
Are you supportive of this type of oﬀer, in general? What eﬀect does the proposal have on Blaine’s balance sheet and how are balance sheet leverage ratios aﬀected? How does the proposal eﬀect Blaine’s income statement and how are interest coverage ratios (such as EBITDA/interest) aﬀected? Do these ratios strike you as manageable for Blaine?
As a member of Blaine’s controlling family, would you be in favor of this proposal? Would you be in favor of it as a non-family member?
Say a member of the Blaine board questions the proposal (in Q1) and asks why not just pay a large special dividend of say, $4.39 per share? How would you respond to this counter proposal?
How does the proposed repurchase create value for Blaine, or does it? Think about this in terms of the interest-‐tax shield (i.e., M&M).
How does the static tradeoﬀ model apply here? Do the agency costs or the pecking‐order model have any relevance here?
However, the ES should not enumerate these questions, nor any directed questions provided for guidance in case preparation. Instead, as mentioned, the format of ES should be that of a professional memo. Note that the most important key issues are those covered in the class discussion. Finally, you only have two pages for the write up, use that space to analyze the problem rather than to provide background or review established facts in the case. Assume the members of the Board are familiar with the problem but are looking to you for analysis and advice. This ES should be included along with your answers to the optimal capital structure problem from the textbook.