1. Should Dubinski recommend a large share repurchase to Blaine’s board? What are the primary advantages and disadvantages of such a move?
2. Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt bearing at an interest rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. How would such a buyback change Blaine’s:
a. Debt ratio?
b. Interest coverage ratio?
a. Earnings per share?
3. Calculate the incremental value to Blaine’s shareholders in terms of interest tax shields from the proposed recapitalization in #2 above. Ignore personal income taxes for your analysis.
4. As a member of Blaine’s controlling family, would you be in favor of the proposed recapitalization in #2 above? Would you be in favor of it as a non-family shareholder?