BED BATH & BEYOND
Suggested Study Questions
1. How would you characterize the business risk of Bed Bath & Beyond? Review their financial performance. Business risk in the case of BBBY is low if you only consider that the products they sell are produced by name brand companies, so any products needing repair could be sent directly to the name brand company. By passing BBBY and that BBBY has no control over the quality of the products they sell and that there are no significant switching costs. However, their degree of operating advantage is high which would indicate high business risk. If management adds fixed operating costs to their business operations, without an increase in sales, the firm's profit declines and it
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Repurchasing shares with a 40% debt to total capital ratio would increase shareholder value, however repurchasing shares with an 80% debt to total capital ratio would significantly decrease shareholder value and therefore would not be advisable. Increasing debt increases shareholder value to a certain point. As this proforma shows, the point of diminishing return is somewhere between 40% and 80%.
3. What capital structure would you recommend as appropriate for Bed Bath & Beyond? How much financial risk would Bed Bath & Beyond face at each of the proposed levels of debt? Capital Structure for Bed Bath and Beyond An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.
BBBY will need to trade off business risk
In what ways does Trader Joe's demonstrate the importance of each responsibility in the management process—planning, organizing, leading, and controlling?
With different level of the debt of the company according to Exhibit 3, we would predict by comparing to its peer Warner. Lambert Company at 32.4% debt to total capital ratio still maintain at weak AAA level. AHP had much better financial performance e.g. Earnings per Share and Return on Equity. With 50% Debt to Total Equity ratio, AHP may receive lower rating at AA level and we do not expect them to go lower than BBB rating even with 70% Debt to Total Equity
Company does not have big amount of debt to pay. In 1994 its outstanding debt is only 36.4% of its total assets which is a healthy rate. Its current assets are higher 2.4 times than its current liability. Also company has no outstanding interest to pay. Price earning ratio of 42.80 is highest among the competitors. (Pls. see exhibit 2, 3&4) for details. So we can safely conclude that BBBY has great potential to sustain.
Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.
2) Is Diageo’s current capital structure appropriate to its new business? It believes that it has traditionally had a conservative debt policy. If so, is that policy still appropriate? Has Diageo’s capital structure been as conservative
Heitor Almeida, T. P. (2004, 10 1). How should we discount the costs of financial
By paying out excess cash and issuing debt, BBBY could improve return to equity holders and raise earnings per share (by a share repurchase).
We would recommend the capital structure with 30% debt. This is because with 30% debt, they would be able to repurchase 19.8 million shares outstanding as well as save 37.8 million in taxes. EBIT is high in this company, and because of this, financial leverage will raise EPS and ROE. However, variability also increases as financial leverage increases, so the company would not want to take on too much debt and become very risky.
16. How would you assess the overall risk structure of the company in terms of its Operating Risks and Financial Risk (Debt to Capitalization Ratio)? Very strong Net Worth and DTNW, and low debt to total
2. Do you think Bed Bath & Beyond has too much cash? Should Bed Bath & Beyond lever up? Consider both the 40% and 80% debt-to-total capital proposals.
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
Running Head: DOLLAR GENERAL 1Dollar General StrategiesGlenda ReeseManagerial Marketing BUS 620Professor Mary WrightJuly 8, 2012
The statement of cash flows outlines some of the changes to the capital structure. The company added $164.5 million in a consolidated loan facility, and it paid out $138.1 million in dividends. There were no share buybacks during the year. The company states in the annual report (p.4) that it intends to maintain a conservative gearing ratio. The company in this section attributes its increased borrowings to projects and opportunities on which it has embarked. These investments lie within the integrated retail, franchise and property system. One of the
Pro-forma income statement and key credit rating determinants are shown in Exhibit 2 and 3 respectively. Remaining share no. of 158.3m after repurchase is based on proportional value addition distribution between cash-out and remaining shareholders and this number is inserted to calculate earning per share and corresponding immediate share price change after announcement of repurchase program. According to Exhibit 3 and industrial average of relevant grades, only fund flow/ total debt and total debt/ capital measures are not comparable with A credit rating. Considering EBIT and EBITDA interest coverage are two most important criteria and equity market value is so substantially different from book value which leads to a healthy
3. If Lex had no debt in its capital structure, what would be its cost of capital? How could this estimate be used to value Lex? If Lex operated with essentially no leverage in its capital structure and then added a moderate amount of debt, how would this affect its total value? How might we capture this value impact of debt in our valuation analysis?