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Bed Bath & Beyond The Capital Structure Decision Case Solution

Case ID: KEL082
Solution ID: 6026

Words: 2366

Price: $75

Case Solution

Bed Bath & beyond (BBBY) was free of any long term debt in its balance sheet. Although a number of financial assessors thought of BBBY’s balance sheet as a tool for its success that allowed higher adaptations, some also saw it as a threat of its progressing cash balance. The issues drew queries about BBY’s capital structure. In the beginning of 2004, the interest rates were decreased substantially, making it a lucrative period to think about borrowing debt and undergoing a program to buy back its markets shares or a consider a unique dividend. Allows some capital structure offers for students to review.

Excel Calculations

Balance Sheet for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)

Income Statement for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)

Statement of Cash Flows for Bed, Bath and Beyond, FYE 2001-2003 ($ in thousands)

Leases- PV

Pro Forma 2003 Results for Alternative Capital Structures ($ in thousands)

Questions Covered

How would you characterize the business risk of BBBY? Review the financial performance.

Is BBBY a good candidate for increased financial leverage?  What are the pros and cons for increasing the leverage of the company?

Does BBBY really have no debt?  What does the balance sheet look like after adjusting for operating leases?

Do you think BBBY has too much cash? should BBBY lever up? Consider both the 40% and 80% debt-to-total capital proposals.

What capital structure would you recommend as appropriate for BBBY? How much financial risk would BBBY face at each proposed levels of debt?

How much potential value, if any, can BBBY create for its shareholders at each proposed level of debt?

How would the capital markets react to a decision by the company to increase the use of debt in the capital structure?

How might BBBY implement a more aggressive capital structure policy? What are the alternative methods for leveraging up?

What is your estimate of the change in the stock price of BBBY if the company recapitalized by issuing debt to buy back stock?  Assume multiple scenarios in regards to the size of the repurchase.  Would you recapitalize the company?

What arguments would you advance to persuade management to adopt your recommendations?