Caso Winfield

Blaine Kitchenware Inc Capital Structure Harvard Case Solution & Analysis

Blaine Kitchenware

1. As the current financial policy of the organization is analyzed, it is found out that the organization is very conservative in its financial policy due to which it has made use of debt only two times during its life. As the time passed by, the organization became very concerned with changing its policies in order to obtain the benefit of debt.

According to Pecking order theory, the organization should be financed from the following sources of funds:

1. First from retained earnings, as it is free of cost.

2. Secondly from the use of debt, as its issue cost is low and also the tax relief provided on its interest payment could generate huge cost savings.

3. Finally from the use of equity because it is expensive in terms of issue cost and the return demanded by the shareholders based on both the business and financial risk.

The current capital structure of the organization does not seem to be optimal, as it fails to realize the benefit of cost savings generated from the use of debt.

According to Miller-Modigliani theorem, the usage of debt could lower the total cost of capital due to tax relief available on the interest payment on loan. Similarly, it is also strongly suggested that the use of debt should be made as much as possible, because it lowers the total cost of capital however; the over leverage capital structure could lead to the following drawbacks:

1. It could lead to liquidation of the organization, if there is non-payment of interest and principal amount.

2. It allows the lender to foreclose the organizational assets if there is no possibility of payment.

3. It also imposes some restriction on the activities of the organization in the form of covenants.

4. It also requires commitment in the form of regular payments of interest due to which it limited the profitability return and the cash flow for other activities such as capital investment and dividend payment.

Despite the analysis above, there is not a single theory, which specifies what type of capital structure could be optimal, so it’s not relatively easy to predict the optimal structure as it depends on the context within which the organization exist.

1. Share repurchase program would involve a situation where the original owners of the organization would buy back the shares previously sold.

The advantages and disadvantages of the program are as follows:

Advantages Disadvantages

It would increase the share price of the company due to increase in demand and less supply. It could

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