Question

Blaine Kitchenware, Inc. is an all-equity cash-rich company considering the following change in capital structure: • borrow $50 millions at an interest rate of 6.75% • use the loan together with $209 millions of its own cash to repurchase 14 millions shares at the current market price of $18.50/share Currently, the (market value) balance sheet and the income statement of Blaine Kitchenware, Inc. are as follows (expressed in $ thousands) : Assets Liabilities Cash $230,866 Debt $0 Other Assets $257,497 Equity $488,363 Total $488,363 Equity $488,363 Revenue $346,366 Less: Cost of Goods Sold $249,794 Gross Profit $96,572 Less: Selling, General & Administrative Expenses $28,512 EBIT $68,060 Earnings Before Tax $68,060 Less: Taxes $23,821 Net Income $44,239 Dividends $28,345 1 Questions: . Calculate the dividends per share for the current and proposed capital structure and discuss how capital structure affects the cash flows to shareholders. please explain how to calculate dividends? not just the answer. Thank you

Answer 1

A-
		current		Proposed
EBIT		68060		68060
Less interest		0	500000*6.75%	33750
before tax profit		68060		34310
taxes		23821		12008.5
net income available to shareholders		44239		22301.5
Dividend paid = net income available to common shareholders*dividend payout ratio	44239*64.07%	28345	10489*64.07%	14289.11
No. of shares outstanding = value of equity/ market price per share		26398		12398
Dividend per share	dividend paid/no of shares outstanding	1.07		1.15
Dividend payout ratio	28345/44239	64.07%
no of shares outstanding
No. of shares outstanding = value of equity/ market price per share		26398	26398-14000	12398
Tax rate	tax paid/before tax profit	23821/68060	35%
B-This change in capital structure increases the dividend per share as due to increase in leverage in capital structure. Use of leverage or debt in capital structure will results in interest tax shield due to tax deductability of interest expense of debt and this will increase the profit available to common shareholders as number of shareholders are reduced due to purchase of commpn stock of company so as a result dividend per share increased