Consider the following share repurchase proposal: Blaine will use $209 million of cash (and marketable securities) from its balance sheet and $50 million in new interest-bearing debt at the rate of 5.88% to repurchase 14.0 million shares at a price of $18.50 per share. a. Restate the income statement and balance sheet for 2006 showing the effect of adding debt. b. Consider the impact on, among other things, Blaine's earnings per share, ROE, interest coverage (TIE), and debt ratio. How will these change, and are these changes positive for the shareholders? c. How does Blaine compare to competitors after the repurchase? d. 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 shareholder?

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Business

Sonny Cannon

27 July, 10:06

Consider the following share repurchase proposal: Blaine will use $209 million of cash (and marketable securities) from its balance sheet and $50 million in new interest-bearing debt at the rate of 5.88% to repurchase 14.0 million shares at a price of $18.50 per share. a. Restate the income statement and balance sheet for 2006 showing the effect of adding debt. b. Consider the impact on, among other things, Blaine's earnings per share, ROE, interest coverage (TIE), and debt ratio. How will these change, and are these changes positive for the shareholders? c. How does Blaine compare to competitors after the repurchase? d. 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 shareholder?

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Antoine Simmons · Answer 1

a) Income statement

Net income will decrease due to interest expense

interest expense ($50, million * 5.88%) = $2,940,000

Balance sheet

Assets

Bank will decrease by the $209 million

Equity and liabilities

Equity

Stock outstanding will decrease in both numbers (14.0 million shares) and in amount ($ face value or par)

Retain earnings will decrease by gain (loss) on repurchase of stock

b) - The EPS

The EPS will increase (decrease outstanding share) and it is a positive change, but changes in earnings will decide the change in EPS ultimately.

-ROE

ROE increases and it is a positive change, the higher the ROE the higher the attraction on investors and it is positive.

Interest coverage

Interest coverage will decrease due to the new interest expense added by the loan taken and this is negative.

Debt Ratio

The debt ratio will increase meaning more debt is used to fund assets and the increase is negative.

c) Since the ROE and EPS will increase then Blaine is doing good but with a debt risk now it will depend on the expectations of the investor and his risk appetite, but if judging by ROE then it is doing good.

d) If i was a family member i would not accept the proposal, taking on debt and using so much funds from the business to fund repurchase of shares, no this could leave the business with difficult times.

If I was a shareholder and not family, i would accept as my share price would increase hence returns