Blaine Kitchenware’s Current Capital Structure

Blaine Kitchenware, Inc， founded in 1927，was a mid-sized producer of branded small appliances primarily used in residential kitchens.BKI had just under 10% of the $2.3 billion U.S. market for small kitchen appliances.

Blaine is holding a conservative capital structure that is all consist of common stocks. At the end of 2006, Blaine’s balance sheet was the strongest in the industry. Not only was it debt-free, but the company also held $ 231 million in cash and securities. Common dividends’ paying was one of the largest uses of cash, and the payout ratio is abnormally high 50%. In a word the company have huge cash reserves with not many new profitable project to invest.

We believe Blaine was “over-liquid and under-leveled” as the banker concluded from data in Exhibit 1 and 2. Being over liquid could portray the company in a negative way, since many investors might wonder why the company is sitting on such a large amounts of cash. Depending on the industry, it could be, because it is protecting itself from volatility, but it is still may warrant concern from investors. And to absorb the idle cash, pay-out ratio was unreasonably high.

Usually, companies prefer raising capital in debt more than equity, because tax shield derived from debt makes debt more attractive to stock issue. And there will be an opportunity cost when a company holds a large sum of cash instead of investing it. What’s more, the shares will scatter if Blaine is all financed by issuing stocks. So there may be a potential problem that some private equity firm may purchase all of Blaine’s outstanding shares and takeover the BKI. In this way, current debt-free capital structure is not so efficient and attractive.

Even though Blaine Kitchenware, has always had massive cash reserves, and doesn’t believe in excessive debt levels, further