Bed Bath & Beyond’s increasing sales enabled the company to grow at the very high rate. The company’s earnings over the past years from 1993 did nothing but went up. Having a low cost culture company BBBY managed to provide low prices to customers and at the same time maintaining their above average margins among their competitors. Since the company is in a growth stage in the company’s life cycle the capacity to borrow money shows up. Debt can be beneficial in helping to save in taxes. The right mix of debt and equity also can increase the firm value. Moreover, since the company’s control is decentralized, debt could also serve as an antidote to the complacency. In this case managers would have to ensure that the projects they pick at least …show more content…
Bed Bath & Beyond has an excess amount of cash piling up on the balance sheet and it is projected to grow even more which brings up an issue of proper use of cash. Issue The company contains an approach that cash is king and debt is bad. This approach serves well when the company that generates excess amount of cash finds a proper use for cash, and it serves opposite if the cash piles up on the balance sheet and loses its value over time. Bed Bath & Beyond is very efficient in the way it uses their assets to generate income. Since the company generates superior earnings and its cash balance is growing at the high rate, many analysts forecasts the cash balance of over 3 billion by 2007. This creates a controversial opinions about growing cash balance. Some analyst believes that the balance sheet is a strength rather weakness as oppose to others who consider it risky. However, the main issue among the investors is their capital structure. Investors started to question management …show more content…
AAA rated debt would yield 5.33 percent. I calculated cost of equity using bond yield plus risk premium approach, where I used yield of 5.33 percent and 10 year Treasury bond rate of 3.83 percent which gave me a cost of equity equal to 9.16 percent (Exhibit 1). Since I had cost of equity I used historical risk premium and Treasury bond to obtain beta for Bed Bath& Beyond Company. The beta for the company was 1.15 with zero leverage. Given the amount of debt that BBY considers to add I found their cost of debt. Given the cost of debt I found the cost of capital which happened to be 8.99 percent (Exhibit 4). As a final step I isolated debt effect on the cash flows as I used different capital structure to execute share repurchase. I calculated annual savings in cost based on different capital structure. Based on this information I calculated the increase in the firm’s value in per share basis. As a result of that we were able to see the stock price after stock buyback. This also impacted the EPS measure which went up after the stock buyback. (Exhibit