3. (30 points) Blaine Kitchenware was a mid-sized producer of home appliances. You...
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3. (30 points) Blaine Kitchenware was a mid-sized producer of home appliances. You are provided with the following table to summarize Blaine's financials in 2020. and bond ratings based on S&P. The risk-free rate at that time was 3.5%. The equity risk premium was 6%. The marginal corporate tax rate was 38%. CEO decided to change the capital structure and make the new debt level to 50% (i.e., D/(D+E) ratio). Assume that this change in capital structure only involves debt-to-equity swap and does not affect the total firm value. Blaine Kitchenware Interest Coverage Rating Spread FY 2020 ($ million) > 8.5 AAA 1.25% Revenue 32,251 6.5 - 8.5 AA 1.75% EBITDA 7,860 5.5 - 6.5 A+ 2.25% EBIT 6,946 4.25 -5.5 A 2.50% Net income 5,630 3-4.25 A- 3.00% Market capitalization 61,000 2.5 - 3.0 BBB 3.50% Market debt 45,000 2.25 -2.5 BB+ 4.25% Equity beta 0.87 2.0 -2.25 BB 5.00% 1.75 -2.0 B+ 6.00% 1.5 - 1.75 B 7.25% 1.25 -1.5 B- 8.50% 0.8-1.25 CCC 10.00% 0.65 -0.8 CC 12.00% 0.2 - 0.65 C 15.00%
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