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BNRR and Blaine Kitchenware case

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Question;1.Lease financingAssumethe facts of the BNRR case, except for the following changes and additions.In analyzing the lease versus buy decision for auto-rack cars, we initially assumed a base case in which the equipment would not be operated beyond 15-year life of the lease. Later, we relaxed this and assumed that it?s BNRR?s intention to operate the cars for their full economic life of 22 years, and that Norwest would grant BNRR an option to purchase the cars for $9.2 million after the lease is up. Continue to assume that it?s BNRR?s intention to operate the cars for their full useful life of 22 years, but now assume also that Norwest will not, nor will any other potential lessor, guarantee a buyout price for the cars at the end of the life of the lease. (Assume any buyout price is depreciated using straight line.) Should BNRR initially lease or buy the auto-rack cars? Explain and justify.2.Capital StructureAssume the facts of the Blaine Kitchenware case, except for the following changes and additions. Note: in question 1 of the original case discussion, the investment banker recommended that Blaine borrow $50 million at 6.75% and use the proceeds plus $209 million of its cash and securities to purchase 14 million shares at $18.50 / share. (Assume, as in the case, that Blaine currently ? prior to any recap -- has 59 million shares out and a current stock price of $16.25.) What?s changed now is that the investment banker has forecasted Blaine?s cost of debt and equity at various levels of new debt so the amount of debt to be borrowed for the recap can be optimized and the amount of equity repurchased would be adjusted accordingly (i.e., if it?s optimal to borrow $40 million rather than $50 million, the amount of equity to be repurchased would be reduced by $10 million.)Blaine?s EBIT forecast for 2007=$70 million per year, in perpetuity.Federal-plus-state tax rate=34%.Expected growth rate=0%.The cost of capital schedule predicted by the investment banker is as follows:At a Debt Level of (Millions of Dollars)$0$20$40$60$80$100$120$140Interest rate (%)-6.256.56.757.07.58.259.5Cost of equity (%)10.010.2510.510.7511.011.512.515.0a. Explain why Blaine should consider a recap and how it could add value.b. Recommend the financing of the recap in terms of the amount of debt issued.ill not, nor will any other potential lessor, guarantee a buyout price for the cars at the end of the life of the lease. (Assume any buyout price is depreciated using straight line.) Should BNRR initially lease or buy the auto-rack cars? Explain and justify.

 

Paper#48548 | Written in 18-Jul-2015

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