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FIN - 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;$140;Interest rate (%);-;6.25;6.5;6.75;7.0;7.5;8.25;9.5;Cost of equity (%);10.0;10.25;10.5;10.75;11.0;11.5;12.5;15.0;a.;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.;="msolistparagraph">

 

Paper#48957 | Written in 18-Jul-2015

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