Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share.

How would such a buyback affect Blaine? Answer the questions by following the steps described below.

1. What are the effects of the proposed repurchases on BKI financial statements (Consider only in year 2006)?

   1. On the balance sheet?

   2. On the income statement?

   3. On leverage (D/E ratio and interest coverage ratio), liquidity, EPS, and ROE? How would that compare with its peer firms?

2. Does the proposed repo create any value? How? (Hint: What is the interest tax shields in one year, and in perpetuity?)

3. What are the costs of the proposed repo? (Hint: the cost of financial distress (or bankruptcy cost), define what it is and how it is calculated. How will it change under the proposed repo?)