The focus of this case is to understand how leverage should affect beta and the impact of different levels of debt on the WACC. In the end you are providing a recommendation to Blaine insiders to help them make an informed decision on a stock repurchase proposal so as to reach an optimal capital structure. Please consider addressing the following questions in your summary:
Suppose that Blaine’s investment bankers proposed using $209 million of cash from the balance sheet and $50 million of new debt to repurchase 14.0 million shares at $18.50, a premium to the current price.
i) Should Mr. Dubinski recommend this repurchase proposal to the Board of Directors? If so, is that the optimal amount of debt to issue? Or, should they take on more debt and buy back more shares? (What does your analysis on WACC imply about Blaine’s optimal capital structure?)
ii) With your suggested repurchase plan (take debt to buy back shares), you also need to find the Break-Even EBIT to check if your proposed capital structure change (add debt to buy back stock) is feasible.
You will submit TWO files to this Assignment: the Excel file containing the WACC worksheet, and the one-page Executive Summary with 12 font and normal margins. Be sure to retain the original Excel formatting so that I may click on each cell to determine its derivation.
Team Presentations
Two Groups will present their findings for Blaine Kitchenware case. Remember to introduce each member, have each member present, be prepared to answer questions, and limit your presentation to 20 minutes. Remember to address your points to the assumed Board of directors in Blaine, make eye contact, and do not simply read the slide, but communicate your points clearly to the audience.
PRACTICE!!!
7) New Heritage Case
The focus of this case is to understand basic capital budgeting analysis. Each team will evaluate two investment alternatives within all proposals and provide a recommendation to Ms. Emily Harris about what New Heritage should do regarding these two projects under consideration (Make My Doll’s Clothing (MMDC) and Design Your Own Doll (DYOD)).
Please consider addressing the following questions in your summary:
1) Based on the information provided in the case, what’s the NPV, IRR, Payback and Profitability of each project (MMDC and DYOD)?
2) Suppose that 2010 is our “year 0” for proposed investment, and that the Terminal Value (TV) is starting as a perpetuity with a constant growth rate(g). After your initial setting, please perform sensitivity analysis for NPV using a TV growth rate (g) = 0%, 1% and 2% as well as that assumed in the case, along with discount rate (r) = 7.7%, 8.4% and 9.0%, also as discussed in the case.
3) Please also consider the viability of either project after 2020. If the life of either investment is only limited, please re-estimate each project’s NPV either with a zero TV, or with the “salvage value” (the BV of PPE + NWC in 2020). How does the consideration of terminal value impact your recommendation for project selection?
You will submit TWO files to this Assignment: the Excel file with Exhibits 1 and 2 completed (if needed with a third tab for the NPV Sensitivity Analysis), and the one-page Executive Summary with 12 font and normal margins. Be sure to retain the original Excel formatting so that I may click on each cell to determine its derivation.
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