Do You Believe Blaine’s Current Capital Structure and Payout Policies Are Appropriate? Why or Why Not?
1. Do you believe Blaine’s current capital structure and payout policies are appropriate? Why or why not?
In Finance, capital structure is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. In addition, it is how a firm finances its overall operations and growth by using different sources of funds (Investopedia.com). Investors usually refer capital structure to a firm’s debt-to-equity ratio, which explains its riskiness. According to the current situation, I think Blaine could improve its capital structure by borrowing more money to buy back its own shares since Blaine is currently over-liquid and under-levered. In this case, Blaine’s shareholders are suffering from the effects.
Because Blaine is a public company with large portion of its shares held by conservative family members, Blaine has huge financial surplus and causes bad financial leverage. In other words, Blaine does not fully utilize its funds. Blaine is not taking advantage from leverage more than two times in its business history. In 2007, Blaine has about $231 million in cash and securities with no debt according to its balance sheet. In the M&A point of view, such huge amount of cash would not only offer possible acquirer incentives to buy Blaine with its own cash but also decrease the enterprise value of Blaine from $959 million to $729 million. In other words, acquirers could pay way less than they originally expect to buy out this family-based family.
Regarding the payout policies, investors usually consider the periodical dividend as an evaluation for a healthy company. Dividend to investors is like the interest income to banking depositors. It pays investor interest income while they could still own the stock. In general, the primary goal for business firms is to maximize shareholder’s value. Paying dividend is a way to benefit their shareholders, but it could also be tricky. Although