Bed Bath & Beyond – the Capital Structure DecisionEssay Preview: Bed Bath & Beyond – the Capital Structure DecisionReport this essayAdvanced Corporate Finance Case: ‘Bed Bath & Beyond: The Capital Structure Decision’. 1) Scenario 1: debt to capital ratio = D/(D+E) = 35% Assumption: the company uses a perpetual debt policy then we can use the following equation: Pv(interest tax shield) = τc x Debt. To calculate the debt, we use the formula debt to capital ratio = D/(D+E) = 35%. Debt + Equity – excess cash= 2,865,023,000-400,000,000= 2,465,023,000. D = 0.35 x 2,465,023,000 = 862,758,000 Pv tax shield= 0,385 x 862,758,000 = 332,162,000 Scenario 2: debt to capital ratio = D/(D+E) = 85% Assumption: the company uses a perpetual debt policy then we can use the following equation: Pv(interest tax shield) = τc x Debt. To calculate the debt, we use the formula debt to capital ratio = D/(D+E) = 85%. Debt + Equity – excess cash= 2,865,023,000-400,000,000= 2,465,023,000. D = 0.85 x 2,465,023,000 = 2,095,270,000 Pv tax shield= 0,385 x 2,095,270,000 = 806,679,000 2) Scenario 1: to calculate the amount of shares that BBBY is going to repurchase we first determine how many shares we can buy back with the excess cash and debt with the old shareprice of Pold= 37.00$ Number of shares repurchased= (excess cash + Debt)/ share price = (400,000,000 + 862, 758, 000) / 37.00 = 34. 13 million shares 296, 854, 000 – 34,130,000 = 262,724,000 shares outstanding after repurchase. Divide the tax shield by number of shares outstanding gives : 332,162,000/ 262,724,000 = 1.26 $ ΔP So the new share price = 37 + 1.26 = 38,26$ Scenario 2: to calculate the amount of shares that BBBY is going to
repurchase we first determine how many shares we can buy back with the excess cash and debt with the old shareprice of Pold= 37.00$ Number of shares repurchased= (excess cash + Debt)/ share price = (400,000,000 + 2,095,270, 000) / 37.00 = 67.440 million shares 296, 854, 000 – 67,440,000 = 229,414,000 shares outstanding after repurchase. Divide the tax shield by number of shares outstanding gives : 806,679,000/ 229,414,000 = 3.52$ ΔP So the new share price = 37 + 3.52 = 40.52 $ 3) Yes, the shareholders’ value increases with the same amount of the increase in the share price. So for the first scenario that is 1.26$ ( 1.26/37x 100% = 3.4% increase) per share and for the second scenario that is 3.52 per share ( 3.52/ 37 x 100% = 9.51%). The current creditworthiness of BBBY = total liabilities / capital = 874,203,000/ 2,865, 023,000= 0.305 = 30.5%. with this total debt- to- equity ratio they fall in the AA rating of Standard and Poor’s without losing any creditworthiness. Their optimal capital structure is the upperbound of the AA scale, which is 35.9%. Because the higher the debt-to-capital ratio the more benefits of the
s. The AA and B rating are the same, but the AA and B are different levels: AA = AAA and B = B2. It is this change that gives our full understanding of the structure of BBBY, along with those of the other ratings that are based on a different methodology than BBBY’s. I suggest that the above comparison of B2 and AA in order to understand how the ratings differ be sure to read the following link ( here ) which offers a lot more detail about the methodology used to calculate the BBBY C rating (it should read like this):
Calculating AB Rating for the United States and Australia : (A/B) 0.9 = 0.6 = 2.4 +3.1 = 3.1 = 3.0 = 3.0 / 7.7 = 0.7 . The AA = A2 rating is also based on a C- rating and A3 = AA, which is based on a C rating for a country. B is based on the ratio of the A1 and A2 levels of debt and assets: A=50, A=42, B=30, (C) = 3, (D) = 13, (E) = 16 2.5 = 8.9, 2.4 = 10.3
The above scale calculation is a lot easier if you can see how the BBBY C and B ratings work. However… The C or BD rating works the same. Because at the end of each rating all debt and credit-worthiness has to be assessed, the BBBY C is based on a C that is then compared using the ratio between both levels. B is based on the ratio of debt and assets. And because the AB and AAA rating are similar and at the end of each rating all debt and credit-worthiness has to be assessed, the BBBY B is based on the ratio of the A level of debt and assets: A = 100, (A+/B) = 85, (A+/B+/C) = 18
One more piece of info here: AB Ratings on the US in the USA (B/B/C), B-C Ratings on the US on the B (B-C) and B-B ratings on the UK in the UK (B-B/CA) on The UK for the US or UK is as follows:
A = 33.4% (0.861) % (1.1)% (20.5) % (2.2)% (32)% (2.1)% (36)% (3.5)% Total liabilities as of December 31, 2014 (The BBB and BBBY C are on average $200, 000 / $220, 000 with a value of just $180,000). Their lowest value per share (12.47) was only $60,000 (or only $25,000,000 per share). Total liabilities (22.8) of $90,000 , $90,000 would equal 1.06$. The AB+C rating is the lower of the