Bed Bath and Beyond Case
Statement of Problem Bed, Bath and Beyond (BBBY) currently has $400 million more in cash than they need for ongoing growth and operations requirements. While the company is financially sound analysts and investors worry about the company’s capital structure decisions. Investors do not want to see that much cash on the books and worry that the current capital structure is not the most effective for the future. They prefer that BBBY change their capital structure by paying out excess cash and issuing debt. This could allow BBBY to improve their return on equity and raise earnings per share. Given the low interest rates available it seems like the perfect time for BBBY to add debt to its capital structure. Until now they company has always had a “cash is king, debt is bad” mentality so the decision to add debt is not one being taken lightly.
Facts and Assumptions BBBY has too much cash. Although it has used the cash for store growth and small acquisition, the company should focus on using their cash to increase shareholder value. Currently BBBY is considering 40% debt-to-total-capital and 80% debt to total capital proposals. If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase its shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37. If BBBY were to use $400 million in excess cash, and borrow $1.27 billion to repurchase their shares, the increase of the basic earnings per share would only be 0.3 while the difference from zero debt to 40% debt-to-capital ratio is 0.6. And the diluted earnings per share would only rise to 1.4. In addition, the actual ROA in 2003 is 13.94 and ROE is 23.21%. With 40% debt-to-capital, the ROA ratio remains constant around 13.23%; however, the ROE ratio grow substantially to 30.46% and even 40.83% in the proforma of 80 leverage ratio. Repurchasing shares with a 40% debt to total
Facts and Assumptions BBBY has too much cash. Although it has used the cash for store growth and small acquisition, the company should focus on using their cash to increase shareholder value. Currently BBBY is considering 40% debt-to-total-capital and 80% debt to total capital proposals. If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase its shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37. If BBBY were to use $400 million in excess cash, and borrow $1.27 billion to repurchase their shares, the increase of the basic earnings per share would only be 0.3 while the difference from zero debt to 40% debt-to-capital ratio is 0.6. And the diluted earnings per share would only rise to 1.4. In addition, the actual ROA in 2003 is 13.94 and ROE is 23.21%. With 40% debt-to-capital, the ROA ratio remains constant around 13.23%; however, the ROE ratio grow substantially to 30.46% and even 40.83% in the proforma of 80 leverage ratio. Repurchasing shares with a 40% debt to total