***PLEASE USE FIGURES AT BOTTOM OF POST TO ANSWER QUESTIONS***

Q1: Calculate your estimate of the market value of equity for Blaine Kitchenware under the proposed $259M repurchase. Assume Blaine in default is expected to experience losses if assets are sold in bankruptcy of about 30% of the book value (a simplified estimate of the true losses), and under the proposal, the probability of default is about 1.5%. Hint: VLev = VUnlev + PV(Tax Savings) - E[Costs of Bankruptcy] Similarly: ?V = ?PV(Tax Savings) - E[Costs of Bankruptcy]

Q2: If Dubinski were to use a repurchase to bring Blaine Kitchenware to its optimal capital structure, approximately, how large would the repurchase be? In other words, what level of debt, paired with the $209M reduction of cash maximizes the value of Blaine? The data in Exhibit 4 is an average for corporate bonds, but more specific quotes for Blaine were obtained (below) from potential lenders based on their specific size, ownership and other considerations.

COVERAGE	RATING	SPREAD	P(DEFAULT)
12+	AAA	1.65%	0.10%
9.5-12.0	AA-	1.80%	0.35%
7.0-9.5	A	2.34%	0.95%
5.0-7.0	BBB+	2.75%	2.35%
4.0-5.0	BB	3.40%	10.21%
2.5-4.0	B+	5.10%	26.79%

• Model EBIT coverage for middle of the range: 8x ?
• Since EBIT is constant under all capital structures at $70.5M
  • (Remember this is why we like EBIT for FCF) ?
• Solve for the interest payment that gives the 8x coverage:
  • Interest payment = EBIT/Coverage = $8.813 ?
• Determine the debt level that results in the given interest payment? ?
  • Interest Payment = Interest rate for A-rating firm * Debt ?
  • Interest rate for A-rating = Risk free rate + Risk premium = 7.44% ?
  • Thus Debt = $118M ?
• Assume cash is at the same level as with Plan C so the cash used for repurchase is $209M ?
• As in Q1, estimate the costs and benefits of debt at this level

Repeat the analysis at each rating to determine how large the optimal repurchase would be for Blaine Kitchenware. Justify your recommendation.

Exhibit 1 Blaine Kitchenware, Inc., Income Statements, years ended December 31, ($ in Thousands) Operating Results 2004 2005 Revenue $291,940 $307,964 2006 $342,251 Less: Cost of Goods Sold 204,265 220,234 249,794 Gross Profit 87,676 87,731 92,458 Less: Selling, General & Administrative 25,293 27,049 28,512 Operating Income 62,383 60,682 63,946 Plus: Depreciation & Amortization 6,987 8,213 9,914 EBITDA EBIT Plus: Other Income (expense) Earnings Before Tax Less: Taxes Net Income Dividends 69,370 68,895 73,860 62,383 60,682 63,946 15,719 16,057 13,506 78,101 76,738 77,451 24,989 24,303 23,821 53,112 52,435 53,630 $18,589 $22,871 $28,345 Margins Revenue Growth 3.2% 5.5% 11.1% Gross Margin 30.0% 28.5% 27.0% EBIT Margin EBITDA Margin Effective Tax Rate 21.4% 19.7% 18.7% 23.8% 22.4% 21.6% 32.0% 31.7% 30.8% Net Income Margin Dividend payout ratio a. Blaine's future tax rate was expected to rise to the statutory rate of 40%. 15.7% 14.7% 14.2% 35.0% 43.6% 52.9%