3.

Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt bearing an interest rate of 6.75% to repurchase 14 million shares at a price of $18.5 per share. How would such a buyback affect Blaine? Consider the impact on, among other things, the familys ownership interest, and the companys cost of capital. After repurchasing the amount of the common stock outstanding will decrease from 59.052 million to 45.052 million, and we know that using new debt to finance would lead to the reduce of net income I*(1-t), which would be reflected in market value, hence according to the equation P1= (P0* N0- D*Rd*(1-t))/N1= (59.052*16.5-50*6.75%*(1-30.8%))/45.052, we are able to get the future price P1, 21.58 per share, going up $ 5.08, and at the same time the book value of equity, cost of capital will also change, here I assume that the market risk premium equals to 5% and Bd0=0, Bd1=1.7%/5%=0.34,and Be=(1+D/E*(1-t))*Ba-D/E*(1-t)*D/E The more detail is shown in the table below. As is seen in the exhibit, the D/E ratio of Blaine Kitchenware company rises significantly to 2.89% and due to the reason of issuing debt, and debt is comparatively cheaper than equity, the Weight average cost of capital lowered 0.89%, and whats more although less than the industry average level, the ROE increases to 22.37% improving substantially, while the firms liquidity still remain good. And considering the familys ownership interest, its susceptible that the family members on the board would welcome such a large stock repurchase, after this activity resulting from the reducing total share outstanding amount, their percentage of ownership of Blaine will rise reversing the downside trend dating from IPO, which means they need to undertake more risk than before. And meanwhile the worrying of both the inconsistency of dividend payout ratio and the discontinuity of its acquisition makes the situation worse, given... Possible Review Questions For The Blaine Kitchenware, Inc. Capital Structure Case 1. From reading the case, do you believe Blaines capital structure and dividend payout policies are appropriate? Why or why not? 2. Should Victor Dubinski recommend a share repurchase to Blaines board? What are the expected advantages and disadvantages of such a move? 3. We are not provided a precise share repurchase proposal from the case. Begin by considering the following one: a. Blaine will undertake a $259 million share repurchase. b. Funding i. $209 million from existing cash and marketable securities on its 2006 balance sheet ii. $50 million in new debt at an interest rate of 6.75% c. Repurchase details

iii. 14.0 million shares iv. Purchase price = $18.50 per share 4. How would such a buyback affect Blaine Kitchenware? You might consider the impact upon the following: d. EPS e. ROE f. Interest coverage ratios g. Debt ratios h. Familys ownership interest i. Firms cost of capital (Developing both a hypothetical income statement and balance sheet for 2006 as if they had done the repo will be helpful with this type of analysis.) 5. Assume you are a member of Blaines controlling family. Would you be in favor of this proposal? Would you opinion differ if you were a non family shareholder? 6. Does the share repurchase proposal of $259 million in question 3 above differ from a special one-time dividend of $259 million? 7. 6) Suppose that Mr. Dubinski has obtained from Blaines banker the quotes shown below for default spreads over 10-year Treasury bonds (note that these differ from the more general corporate bond yields shown in Exhibit 4.). What do these quotes imply about BKIs cost of debt at the various debt levels and credit ratings? Compute BKIs weighted average cost of capital at each of the indicated debt levels. What do your calculations imply ...

Blaine Kitchenware, Inc (BKI) has 80 year history and operates in small home appliance industry. Its revenue generating streams include the sale from food preparation, sale from cooking appliance and a small portion of sale from beverage preparation appliances. In the mid of 2007, BKIs CEO Victor Dubinski faces the decision whether to proceed a leveraged share repurchase. He needs to think about the advantages and disadvantages of this plan and figure out what is best for the company. INDUSTRY ANALYSIS: The small kitchen appliance industry has strong seasonality and is cyclical with the macroeconomic. Holidays, housing buying and renovating peaks are the market driven factors. The net margin of industry average is 9.71% and growth in dollar sales from 2003 to 2006 is only 3.5% despite a strong economic environment. Historically fragmented, the industry is experiencing consolidations the trend will be continued. The following five force analysis reveals the medium to low industry attractiveness. The Threat of Entry There is no effective entry barrier in this industry, so the threat of new entry will be quite high. There is no technology proprietary and the learning curve as a barrier of entry also has minimal effect. Its true that firms operate over long time can reduce the cost by increasing efficiency, but efficiency is not the only cost driver in this industry and will not significantly concern the new comers. The Threat of Rivalry The threat of rivalry is very high. There are high competitions in low-end segments among mass merchandisers and white-box products. The high-end market competitions are also rigorous, especially with the Asian imports and private label products. Whats worse is the price war initiated from aggressive rivals with the intention of buying market share and sales growth. There are possibility for product differentiation such as designs, functions and materials, but these attributes are all easy to be imitated by competitors. The Threat of Buyers The buyer of the small appliance is a mix of wholesalers, retailers, department stores and the consumer. Brand loyalty/reputation in this industry can increase the demand/price inelasticity to some extent, but price is still a major factor when buyer making decisions. So the Buyer threat will be quite high. The Threat of suppliers The threat of supplier is medium. The suppliers include manufactures, material suppliers, logistics providers and distributors. The threat from manufacturers is becoming smaller and smaller with the popularity of outsourcing. Companies including BKI who outsources manufacturing to China and Vietnam will find themselves benefiting from high flexibility and low switching cost in manufacturing and logistics. The threat from materials, which are basically commodities, is also low because there are lots of suppliers in the market. However, the distributors sometime pose big threat. But company can neutralize the threat or even take advantages from a good distributor relationship. For example, shelf space and promotion campaign during selling seasons are all good resource companies can utilize. The Threat of Substitutes The threat of substitute is medium. With the lifestyle become more and more fast-paced, people are consuming more fast food, frozen and prepared food to save time, especially for single, young people group. For this group, the buying intention for kitchen appliances is very low. Restaurants can also function as a substitute. But as long as the majority group still need cooking and eating at home, the demand for kitchen appliance will still exist. COMPANY RISKS: Blaine Kitchenware is a medium-sized company and it captures 10% market share in US. The company has a reputation of high quality with lower price than best-known brands. BKIs recently strategic moves include global expansion, growing its beverage preparation appliance segment and competing in higher-end segment with higher price point. BKI has its competitive advantages, such as its smart technology and its brand recognition. It also has the strength to follow customer buying behavior and market trend. BKI has a very strong net margin, a ratio at 15.67% which is far beyond industry average. However, BKI lacks of organic growth these years and all recent growth is achieved by acquisitions. Now BKI has more and more equity on its book which drags its ROE to 11%, a ratio significantly below industry average. See Appendix 1 for an industry benchmark. In addition, BKI also experienced a downward trend in its operating margin and net margin recently because of integration costs and inventory write-downs with acquisitions of small companies. On the other side, BKI is paying out larger dividend per share, which leads to an over 50% dividend payout ratio in 2006. See Appendix 2 for a year over year comparison from 2004 to 2006. Based on above data, we can conclude BKIs competitive position is medium considering its market share, size,

quality, brand recognition and customer loyalty. The GE matrix in Exhibit 1 illustrated BKIs performance with the industry attractiveness. The arrow shows BKIs decision to explore more growth in the beverage preparation appliance segment. Exhibit 1: GE Matrix for BKI UNDERSTANDING BKIS CAPITAL STRUCTURE Although BKI is a public company, a large portion of its shares is held in the family members. Under their management, BKI is very conservative in terms of financing strategy. There are only two borrows in the history, both under very unique conditions. In 2007, BKI has $231 million cash and securities sitting on its balance sheet with no debt. High surplus cash level and debt capacity have several disadvantages to BKI. Takeover Threat The $231 cash and securities will attract hostile takeovers because the acquirer can use the cash to pay the acquisition cost. Cash, also can be called as negative debt, reduces the Enterprise Value of BKI from $959 million to $ 729 million, making the acquisition a better deal to potential buyers. Reinvestment Risk If the company has a lot of surplus cash, there will be big risks of capital misallocation. The management would think that capital is free, and they will invest in value-destroying projects. For BKI, all recent growth comes from acquisitions of small companies instead of organic growth. These acquisitions have cost BKI a lot, for example, inventory write-down and integration cost. To valuate the acquisitions, we need to apply below formula: [Net Value added = (stand-alone value actual value) + (synergy value Premium)] The Goodwill on BKIs balance sheet increases sharply from $8 million in 2004 to $38million in 2006, indicating BKI has paid high premium for acquisitions. Although its hard to quantify the synergy value, we can still apply EVA approach to assess BKIs performance. We found a negative EVA (see Table 3 a nd Appendix 6 for detail) in 2006, suggesting these acquisitions havent helped BKI to generate enough return over BKIs cost of capital. Table 3: EVA analysis for BKIs 2006 fiscal year ROIC 8.31% - WACC 8.46% = Spread -0.15% x Invested Capital 532,556 = EVA (776) Inappropriate dividend policy Dividend payout has more psychological reasons than economic value. For investors, the periodical dividend is a symbol of healthy company business and managements confidence for continued success. Dividend also allows the investors to make profit without selling the stock. However, the managements goal is to maximize shareholders value. Rather than paying dividend, management should use all available cash in attractive investments. From investor perspective, the dividend payout is not a guarantee of companys success and its not any kind of obligation to investor as well. From the firm perspective, dividend is not tax deductible and it cant bring any tax benefit. Once a company starts to pay periodical dividend, the investors will expect the dividend to continue. Stopping paying dividend might give the investor a perception that the company isnt doing well. In the BKI case, we assume BKIs management want to maintain the current dividend payment schedule, but decrease the payout ratio. So the only thing BKI can do is to reduce the share numbers, with a share repurchase. BKIS RECAP: LEVERAGED REPURCHASE The investment banker, Dubinskis friend, recommended a leveraged share repurchase plan. IN this section, we will exam whether this plan will benefit the BKI, the board and the rest of investors . Leveraged Recapitalization There are lots of benefits related to debt financing. The most important is the tax shields which will be captured by equity holders. Healthy borrowing will increase the firms value. The obligation of payoff debt will force management to focus on cash flows. Using up BKIs debt capacity will increase its enterprise value and discourage the takeovers. But there are both benefits and cost associate with debt financing and such cost, especially cost of financial distress, need to be considered. Well discuss the details later. Share Repurchase Dubinski is concerned about the discharging of cash because he is worried about giving up Blaines war chest to continue its acquisition activities. However, considering negative EVA in and the deteriorating of EBIT and Net margin, stopping acquisition activities might be the correct thing the management needs to do. Another concern Dubinski has is the interest expense. However, he also needs to know that interest expense is tax deductible while dividend is not. Well take a look at BKIs capability to pay interest later. Besides Dubinskis concerns, there are potential problems of share repurchase. One problem is that the market might interpret such move as a negative

indication of lacking of attractive investment. Another potential problem is Buying High, Selling low . If the business foundation is not solid enough, the stock price will decrease after the buyback, then the company will end up with lots of treasury stock with less value. There are lots of benefits associate with share buyback though. According to the case, the Dubinski familys shares are diluted by the acquisitions since its IPO. Share repurchase will decrease the number of share outstanding and increase the family ownership. If BKI also have ESOP, the buyback will increase the managements proportion of share which will help the management to concentrate on perform. From investors perspective, instead of being passively given dividend which subject to income tax, they have more flexibility to choose when they want to sell to taxed, and the capital gain tax will be slightly lower than the income tax. In addition, share repurchase might send a signal to the market that the share is undervalued thus boosting the share price. If the share is fairly valued, market can also interpret the buyback as a positive signal that management is confident in their future business. All in all, leveraged share repurchase can get rid of the surplus cash, decrease the cash carrying cost, reduce the risk of unattractive reinvestment and increase buying cost of hostile takeover. By discharging the cash, BKI can decrease its asset and equity on book and improve its ROE. ASSESSING THE OPTIONS Deciding to go for leveraged recap, BKI needs to compare the different options. In each option, we assume BKI will borrow $50 million at 6.75% interest rate. In the first option, BKI will use $50 million debt and $209 million cash to buy back $259 worth of share at $18.5 per share multiple by $14 million shares. In the second option, BKI will use $50 million debt and $209 million cash to pay special dividend at $4.39 per share for all its shareholders. Table 1 shows the results of key indicators and Appendix 4 shows calculation in detail. Table 1: Key indicators for share buyback and special dividend options Actual Option 1 Option 2 ($50 MM debt + $209MM to buy back stock at $18.5/share * $14 million shares) ($50 MM debt + $209 MMcash to pay div at $4.39/share) Interest Rate 0.00% 6.75% 6.75% Tax Rate 40.00% 40.00% 40.00% # of Share Outstanding 59,052 45,052 59,052 Debt 0 50,000 50,000 Tax Shields 0 20,000 20,000 Cash Payout 0 (209,000) (209,238) MV of Equity 959,596 720,596 720,358 Total Capital 959,596 770,596 770,358 Share Price 16.25 15.99 12.20 EPS 0.89 1.12 0.86 ROE 10.78% 13.59% 10.37% Interest Coverage N/A 21.88 21.88 Family Ownership 40% 52% 40% U 0.56 0.87 0.87 rf 5.10% 5.10% 5.10% rA (CAPM) 8.46% 10.29% 10.29% rE (M&M proposition II) 8.46% 10.44% 10.44% rD 6.75% 6.75% 6.75% WACC 8.46% 10.03% 10.03% The comparison reveals that the leveraged share repurchase provides the higher ROE because it significantly decreases the book value of equity. On the contrary, paying dividend will not change the number of share outstanding. EPS, although could be manipulated and cannot reflect the real economic value of firm, is higher in option 1 than option 2, also because of decrease of number of share outstanding. The companys value ends up the same in both options. From Dubiski familys perspective, the repurchase option is better because they have a bigger ownership in option 1. From the investors perspective, the two options are very if the income tax is similar to capital gain tax, unless they have other consideration such as maintain the share or more flexibility of when to trade to be taxed. The companys business risk increases after discharging of $209 million cas h and securities. So we reweighed the Beta of Asset (U) and got 0.87. Then we get the Levered Cost of Equity (rE) and the Weighted Average Cost of

Capital (WACC) accordingly. We have the WACC in both options because the cash-out amount, the ending debt and market value of equity are all the same under both options. Exhibit 2 is the illustration of changes in cash, debt and equity. Exhibit 2: Change in Cash, Equity and Debt After BKI announces the debt financing plan, the equity value will increase by the present value of tax shields (PVTS), calculated at $50 million * 40% = $20 million. Its stock price should reflect the tax shields and increase to $16.59 per share. However, because BKI will pay a premium price at $18.5 per share for the repurchase, the premium paid reduces the value of share outstanding by $0.59 per share. Thus the remaining share price is $15.99 per share. This is even lower than the previous price at $16.25 per share. This calculation indicates BKIs premium price for buying back is too high. Table 2 shows how the premium reduces the market value of equity after repurchase. The $4.39 dividend option gets an even lower share price because the share outstanding reduces exactly the amount of the dividend amount per share. Table 2: Premium Analysis In Repurchase Previous Market value + TS 979,596 New fair stock price 16.59 Premium/share ($18.5 - $16.59) 1.91 Total premium 26,758 Outstanding share price drop 0.59 New outstanding share price 15.99 If BKI pursue the leveraged repurchase plan, it can reduce its dividend payout ratio to 36.62% (see Appendix 3) if the management decides to continue the current dividend per share schedule. Another significant benefit from leveraged repurchase is improving the ROIC-WACC spread. Although WACC goes up after paying out cash, the discharging of surplus cash also reduce the invested capital significantly, thus contributing to a positive EVA to BKI. See Table 3 for a comparison and exhibit 3 for details. Table 3: EVA Calculation For Share Repurchase 2006 2007E 2007E leveraged repurchase ROIC 8.31% 8.19% 13.48% - WACC 8.46% 8.46% 10.03% = Spread -0.15% -0.27% 3.45% x Invested Capital 532,556 532,555 323,556 = EVA (653) (1,448) 11,169 The overall comparison indicates the share repurchase option is better the dividend option from many aspects. In additional, paying dividend with borrowing will incur unnecessary transaction cost and BKI should avoid choosing this option. EXPLORING THE OPTIMAL CAPITAL STRUCTURE As the leveraged share repurchase will benefit BKI, Dubiski and his investment banker friend need to find out how much BKI need to borrow and its detailed buyback plan. Given the interest rate with different debt rating, we can do a step to step exploration for the optimal capital structure. To keep consistency in this paper, we will use 40% expected tax rate and assume a perpetual debt BKI is pursing. Thus well apply the 5.10% 30 -year T-bond rate as risk free rate. As the comparisons are based on the same premise as above analysis, so well assume BKI will still want to pay out $209 million of cash plus the full amount of debt to buy back its stock. Step 1: Setting the Objective The objective of finding the optimal capital structure is either to increase the spread or maximize the firm value. To find the optimal capital structure, we need to find out the lowest WACC because it can maximize the spread. We also need to take care of the risk of financial distress and make sure BKIs operation cash flow is enough to pay CAPEX, principle and interest. The reasoning is based on two approached: APV approach: Firm value = Base-case NPV + PV of financing effect PV of financial distress PV of agency cost EVA approach: EVA = Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital) Step 2: Finding the Lowest WACC Table 4 is the result of WACC calculation. We found the optimal capital structure (the lowest WACC) turns up to be the point when BKIs debt relationships fall under A rating. One thing we need to mention though. The Hamada equation to find out leveraged beta is assuming the Beta of debt equals zero. While with the drop of bond rating, the risk of debt increase disproportionately and thus cannot be ignored. Company needs to be cautious when doing such analysis. See Appendix 6 for detail calculations.

Table 4: Finding the lowest WACC Debt Relationships AAA AA A BBB BB B U 0.87 0.87 0.87 0.87 0.87 0.87 L 0.93 0.95 0.97 0.99 1.01 1.02 rD 5.75% 5.90% 5.95% 6.93% 8.08% 9.20% rE 10.66% 10.79% 10.92% 11.01% 11.13% 11.22% WACC 9.90% 9.79% 9.69% 9.73% 9.80% 9.91% Table 5 shows the stock price and number of share BKI should buy back. Table 5: Repurchase Plan Details Debt Relationships AAA AA A BBB BB B Tax Rate 40% 40% 40% 40% 40% 40% PVTS 33,148 43,546 53,970 60,900 69,649 75,739 Equity Value + PVTS 992,744 1,003,142 1,013,566 1,020,496 1,029,245 1,035,335 Share Price 16.81 16.99 17.16 17.28 17.43 17.53 # of Share to Buyback 17,361 18,712 20,038 20,904 21,981 22,720 # of Share Outstanding 41,691 40,340 39,014 38,148 37,071 36,332 New MV of Equity 700,874 685,277 669,641 659,245 646,123 636,987 Value of Debt 82,870 108,864 134,924 152,251 174,121 189,348 New Total Capital 783,744 794,142 804,566 811,496 820,245 826,335 Normally companies will pay premium in order to successfully complete the repurchase. Table 6 is the maximum stock price BKI can afford when buying back without decrease the share price to previous level of $16.25 per share. Table 6: Share Repurchases Premium Analysis Debt Relationships AAA AA A BBB BB B Max Price Per Share 18.16 18.58 18.94 19.16 19.42 19.58 Share Price after Premium Paid 16.25 16.25 16.25 16.25 16.25 16.25 Step 3: Assessing the Risk of Financial Distress Its quite difficult to quantify the risk and cost of financial distress, but we can look at BKIs operating cash flow to see whether it can afford capital expenditure, interest and principle. We assume BKI will keep the same level of CAPEX at $10 million. From Table 7, we got positive cash flow after CAPEX and interest expense. Although we dont know the exact principle payment schedule, but we can conclude the BKIs risk of financial distress is not very high, given the nearly $80 million free cash flows and the 9.2X interest coverage multiple in optimal structure point.

Table 7: Cash Flow Analysis Debt Relationships AAA AA A BBB BB B EBIT 72,677 72,677 72,677 72,677 72,677 72,677 NOPAT (EBIT*(1-t)) 43,606 43,606 43,606 43,606 43,606 43,606 +Dep & Amort 11,810 11,810 11,810 11,810 11,810 11,810 -Change in NWC 30,648 30,648 30,648 30,648 30,648 30,648 CFFO 86,065 86,065 86,065 86,065 86,065 86,065 +interest tax benefit 1,906 2,569 3,211 4,220 5,628 6,968 -CAPEX (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) FCF 77,971 78,634 79,276 80,285 81,692 83,033 Cash flow after interest payment 73,206 72,211 71,248 69,734 67,623 65,613 Step 4: Evaluating the Other Benefits One of the other benefits BKI can get is the increase of Enterprise Value. The Enterprise Value is the market value of debt and equity minus the cash. As BKI will get rid of the surplus cash and issue debt, it will turn the negative debt into positive debt. The increase of Enterprise Value is a good repellent for

takeovers. Table 8 shows the Enterprise Value will be increased to $918 million after the leveraged recapitalization. Table 8: Enterprise Value after Leveraged Recap Debt Relationships AAA AA A BBB BB B Enterprise Value 844,747 881,140 917,624 941,882 972,500 993,817 Another benefit is the decrease of payout ratio. When pursuing the optimal capital structure, BKI will need to buy back 20 million of shares. If BKI will continue to pay $0.48 per share dividend, its dividend payout ratio will drop to 31.71%. See Appendix 3 for the dividend payout ratio analysis. Step 5: Challenging the Unknown the last part in the APV equation is the PV of agency cost. BKI is under Dubinski familys control. One of the objectives of the stock repurchase is to take back the control from dilution of shares with many acquisitions and avoiding takeovers. But we need to be careful whether the familys interest aligned with the rest of investors and will need more data to further explore the cost of agency problem. CONCLUSION From the case analysis, we can conclude the importance o f companys capital structure under corporate tax impact. Firms need to explore the optimal capital structure and seriously consider the trade-off they need to take. Surplus cash and unused debt capacity will attract hostile takeovers and cause capital misallocation. A leveraged stock repurchase is an appropriate solution firms can pursue to solve such issues. Appendix 1: Industry Benchmark In '000 Blaine Home & Hearth Design AutoTech Appliance XQL Corp. Bunkerhill, Inc. Easyliving systems EBIT Margin 21.58% 20.21% 16.90% 18.47% 16.63% 12.36% Net Margin 15.67% 9.11% 7.83% 9.56% 9.13% 6.97% ROE 10.98% 11.30% 43.13% 19.55% 41.66% 13.88%

Appendix 2: YOY Ratio Comparison 2004 2005 2006 Total Equity 417,377 458,538 488,363 Increase Total# of Share Outstanding 41,309 48,970 59,052 Increase Net Margin 15.70% 14.70% 14.20% Decrease EBIT Margin 21.37% 19.70% 18.68% Decrease Dividend Per Share $0.45 $0.47 $0.48 Increase Payout Ratio 35.00% 43.62% 52.85% Increase

Appendix 3: Dividend payout ratio analysis: 2006 2007 with Leveraged Repurchase 2007E in optimal capital structure Net income $53,630 $59,052 $59,052 dividends $28,345 $21,625 $12,007 # of Shares outstanding 59,052 45,052 39,014 Earning Per share $0.91 $1.31 $1.51 dividend per share $0.48 $0.48 $0.48 Payout ratio 52.85% 36.62% 31.71%

Appendix 4: Recap Options Analysis Leveraged Share Repurchase V. S. Dividend Actual Option 1 Option 2 ($50 mm debt + $209 cash to buy back stock at $18.5/share * $14 million shares) ($50 mm debt + $209 cash to pay div at $4.39/share) Interest rate 0.00% 6.75% 6.75% Tax rate 40.00% 40.00% 40.00% EBIT 72,677 72,677 72,677

Interest expense 0 3,375 3,375 Other income 15,094 15,094 15,094 Operating income BT 87,771 84,396 84,396 Income taxes 35,108 33,758 33,758 Net income 52,663 50,638 50,638 Share outstanding 59,052 45,052 59,052 Debt 0 50,000 50,000 Tax Shields 0 20,000 20,000 Cash payout 0 (209,000) (209,238) MV of equity 959,596 720,596 720,358 Total Capital 959,596 770,596 770,358 Share price 16.25 15.99 12.20 EPS 0.89 1.12 0.86 ROE 10.78% 13.59% 10.37% Interest Coverage N/A 21.88 21.88 Family ownership 40% 52% 40% U 0.56 0.87 0.87 rf 5.10% 5.10% 5.10% rA (rA=rE when no debt) using CAPM 8.46% 10.29% 10.29% rE 8.46% 10.44% 10.44% rD 6.75% 6.75% 6.75% WACC 8.46% 10.03% 10.03%

Appendix 5: Income Statement (2007 projection): 2004 2005 2006 2007 Revenue 291,940 307,964 342,251 364,865 Less: Cost of Goods Sold 204,265 220,234 249,794 260,837 Gross Profit 87,676 87,731 92,458 104,028 Less: Selling, General & Administrative 25,293 27,049 28,512 30,273 Operating Income 62,383 60,682 63,946 73,755 Plus: Depreciation & Amortization 6,987 8,213 9,914 11,810 EBITDA 69,370 68,895 73,860 82,354 EBIT 62,383 60,682 63,946 72,677 Plus: Other Income (expense) 15,719 16,057 13,506 15,094 Earning Before Tax 78,101 76,738 77,451 87,771 Less: Taxes 24,989 24,303 23,821 35,108 Net Income 53,113 52,435 53,630 52,663 Dividend 18,589 22,871 28,345 N/A Tax rate 32.00% 31.67% 30.76% 40% Average Growth Revenue Growth 3.20% 5.49% 11.13% 6.61% Gross Margin 30.03% 28.49% 27.01% 28.51% EBIT Margin 21.37% 19.70% 18.68% 19.92% EBITDA Margin 23.76% 22.37% 21.58% 22.57% Effective Tax rate 32.00% 31.67% 30.76% 40.00% Net Income Margin 15.70% 14.70% 14.20% 14.87% ROE 12.73% 11.44% 10.98% 11.71%

SG&A 6.94% 5.41% 6.18% Depreciation & Amortization 17.55% 20.71% 19.13%

Appendix 6: EVA Analysis 2006 2007E 2007E with debt Interest rate 6.75% 6.75% 6.75% Tax rate 30.76% 40.00% 40.00% Operating income 63,946 72,677 72,677 taxed amount of operating income 19,667 29,071 29,071 = NOPAT 44,279 43,606 43,606 Total assets 592,253 592,252 383,253 - Operating liabilities (59,697) (59,697) (59,697) = Invested Capital 532,556 532,555 323,556 ROIC 8.31% 8.19% 13.48% - WACC 8.46% 8.46% 10.03% = Spread -0.15% -0.27% 3.45% x Invested Capital 532,556 532,555 323,556 = EVA (653) (1,448) 11,169

Appendix 7: Explore the Optimal Capital Structure Debt Relationships AAA AA A BBB BB B tax rate 40% 40% 40% 40% 40% 40% FY 2006 EBITDA 73,860 73,860 73,860 73,860 73,860 73,860 Interest Expense 4,765 6,423 8,028 10,551 14,069 17,420 Coverage Ratio 15.5 11.5 9.2 7 5.3 4.2 Estimated Cost of Debt 5.75% 5.90% 5.95% 6.93% 8.08% 9.20% Implied Debt 82,870 108,864 134,924 152,251 174,121 189,348 PVTS 33,148 43,546 53,970 60,900 69,649 75,739 Market Value + PVTS 992,744 1,003,142 1,013,566 1,020,496 1,029,245 1,035,335 Share price 16.81 16.99 17.16 17.28 17.43 17.53 Share# to buyback 17,361 18,712 20,038 20,904 21,981 22,720 Share# outstanding 41,691 40,340 39,014 38,148 37,071 36,332 New MV of Equity 700,874 685,277 669,641 659,245 646,123 636,987 New total capital 783,744 794,142 804,566 811,496 820,245 826,335 Enterprise value 844,747 881,140 917,624 941,882 972,500 993,817 U 0.87 0.87 0.87 0.87 0.87 0.87 L 0.93 0.95 0.97 0.99 1.01 1.02 rD 5.75% 5.90% 5.95% 6.93% 8.08% 9.20% rE 10.66% 10.79% 10.92% 11.01% 11.13% 11.22% WACC 9.90% 9.79% 9.69% 9.73% 9.80% 9.91% Max Premium per share 18.16 18.58 18.94 19.16 19.42 19.58 New share price after premium paid 16.25 16.25 16.25 16.25 16.25 16.25 D/V 0.1057 0.1371 0.1677 0.1876 0.2123 0.2291

E/V 0.8943 0.8629 0.8323 0.8124 0.7877 0.7709 D/E 0.1182 0.1589 0.2015 0.2309 0.2695 0.2973