Consider the following share purchase proposal:

Blaine will purchase 14 million shares of its stock at a price of $18.50 per share.

Current stock price is $16.25 per share and shares outstanding equal 59 million.

Repurchase will be funded with:

$209 million cash from balance sheet (includes cash & cash equivalents as well as marketable securities)

$50 new debt issue at an interest rate of 6.75%

Answer the questions below based on the share repurchase proposal.

1. Do you believe Blaines current capital structure and payout policies are appropriate? Why or why not?

2. Should Dubinski recommend a large share repurchase to the board? What are the primary advantages/disadvantages of such a move?

3. What effect would the proposal have on Blaines balance sheet? Name and calculate three effects.

4. Calculate the effect of the proposal on Blaines earnings before taxes and net income. Assume a tax rate of 30.8%.

5. Calculate the effect of the proposal on Blaines leverage and coverage ratios. (Long-Term Debt/Equity, Long-Term Debt/Total Assets, Times Interest Earned)

6. As a member of Blaines controlling family, would you be in favor of this proposal? Why or why not?