Bed Bath & Beyond: the Capital Structure Decision

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CASE STUDY Bed Bath & Beyond: The Capital Structure Decision INDEX 1- Introduction 2- Question 1: What is wrong with building up cash? 3- Question 2: Present value of tax shield 4- Question 3: Estimation of the number of shares BBBY can repurchase under each scenario and at what price 5- Question 3.1: Evaluation the decision from the perspective of BBBY’s shareholders 6- Question 4: Estimate BBBY’s bond rating under each scenario 7- Question 5: Optimal leverage ratio 8- Question 6: Conclusion- Overall analysis of the company’s capital structure 1- Introduction Bed Bath & Beyond is a chain of domestic merchandise retail stores across United States, Puerto Rico, New Zealand and Canada. It was founded in 1971 by Warren Eisenberg and Leonard Feinstein. During the latest years it reached a huge success in the market highlighting from its competitors. This success can be attributed to several factors as decentralized store control, high margins, low cost structure and good customer experience leading to high store productivity. Considered one of the best performing retail companies, and even one of the top-performing public companies, by 2003 BBBY had experienced a fortyfold increase in stock price since its 1992 initial public offering. Cash, cash equivalents, and short-term investment securities at the end of fiscal year 2003 had grown more than 40 percent relative to the preceding year to $867 million. It was estimated that BBBY’s cash balance was $400 million higher than its ongoing requirements for growth and operations. These factors allowed the company to be widely admired by equity analysts but it also raised important questions concerning the deterioration of return on equity. The purpose of this case study is to analyse the best possibilities to increase the company value taking into account the problems around the current capital

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