Consider the following share repurchase proposal: Blaine will use $209 million o
ID: 2739258 • Letter: C
Question
Consider the following share repurchase proposal: Blaine will use $209 million of cash and $50 million in new debt (borrowed at an interest rate of 6.75%) to repurchase 14 million shares at a price of $18.50 per share. Evaluate this proposal and its effect on the company’s financial statements (income statement and reorganized balance sheet), EPS, ROE, interest coverage ratio, debt ratio, among other measures.
Can we quantify the pre- and post-repo cost of financial distress for the firm? Why or why not?
Explanation / Answer
Shares repurchased value=18.5*14mn=$259mn
Income statement the net profit will come down since we have to pay interest on debt .
In balance sheet assets will decrease by $209 mn and liabilities will decrease by $50 mn but equity will increase by $259mn.
EPS will decrease since no of shares ncreases, EOE will decrease, Interest coverage ratio will decrease, Debt ratio will decrease.
Since we dont have data given on balance sheet and P&L, we are not able to calculate values