. Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
No, Blaine’s current capital structure and payout policies are not appropriate. The company is currently over-liquid and under-levered when it comes to its capital structure. This company in fact issued no debt in 2006.Since the company is totally equity financed, there is no tax shield, which would actually increase the company’s value. This reveals that they did not make the best of their available fund. Excess cash will lower the return on equity and increase the cost of capital. It also decreases the enterprise value of Blaine. In addition, it increases the takeover risk of Blaine because a huge amount of cash offer possible acquire incentives to buy Blaine with its own cash. Acquirers could pay way less than they originally expect to buy the company.
Regarding the payout policies, the dividend payout ratio from 2004 to 2007 is 35%, 43.6% and 52.9%.Investors usually take dividend as an indicator of a healthy company, and they also expect dividend will be paid continuously at either stable or growing rate. But its payout ratio was unsustainable. Hence, the optimal way is to reduce its shares outstanding with a stock repurchase. by repurchasing shares, the company could adjust its unbalanced capital structure, and even raise debt to finance its purchase. It also will send a signal to the market that the share may currently be undervalued, and thus boost the share price. If the share is fairly priced, market could also interpret the repurchase behavior as a positive signal that the board has confidence in the company’s future performance.
2. Should Dubinski recommend a large share repurchase to the board? What are the primary advantages/disadvantages of such a move?
Yes, Dubinski should recommend a large share repurchase to the board.There are quite a few advantages of share repurchase for Blain. Share repurchase will result in a decrease in...