Bed Bath Beyond Cap Structure free essay sample

Bed Bath and Beyond Cash and Debt-to-total Capital While BBBYs balance sheet is strong, there are risks of having too much cash. Namely the risk of not attracting or keeping investors, because of their desire to maximize their returns. When an investor sees to much cash on the balance sheet, they may question the companys ability to manage their capital structure efficiently, and therefore question their ability to maximize shareholder value. While BBBY uses their cash for store growth and small acquisitions, they should also be focusing on using their cash to increase shareholder value. 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. We will write a custom essay sample on Bed Bath Beyond Cap Structure or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 35 to 1. 41 and their diluted earnings per share from 1. 31 to 1. 37 (exhibit 2). If BBBY were to use $400 million in excess cash, and borrow $1. 27 billion to repurchase their shares, they would decrease their basic earnings per share from 1. 5 to . 70 and their diluted earnings per share from 1. 31 to . 72 (exhibit 2). 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%. 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 gt; ROA and ROA gt; 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 against financial risk. They operate in an industry with fairly low business risk however BBBYs operating leverage is high which ould indicate a higher than industry business risk if they are not cognizant of managing their fixed costs. In addition, BBBYs debt to total asset ratio is higher than their industry. Both of these indicate a high business and financial risk. If BBBY were to recapitalize to 80% debt to total capital it would only increase their financial risk and reduce shareholders earnings per share. Therefore the recommendation for a capital structure for BBBY would be to add more than the 40% debt to total capital but not more t han 80%.