Bed Bath & Beyond
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I recommend that Bed Bath & Beyond adopt a structure of 40% debt-to-total capital. This new capital structure will allow for the repurchase of 27 million shares of its outstanding stock at a price of $38.26 per share. The total cost of the repurchase will be $1.03 billion, financed by 400 million excess cash and 636 million in borrowed funds.
At present, the company has an extremely high level of excess cash. This is a result of its over liquidity and from being under leveraged. I created a forecast model exploring the 2005-07 financial situation. The model displays the following critical information:
In terms of liquidity, the repurchase will have the following effects:
Current Ratio will decrease from 2.55 to 1.11
Quick Ratio will decrease from 1.24 to 1.13
Cash Ratio will decrease from 1.12 to 0.33
In terms of financial leverage, the repurchase will have the following effects:
Debt Ratio will increase from 0.30 to 0.57
Debt/Total Capital will increase from 0.43 to 0.88
By financing the repurchase through a 40% debt structure, the company becomes less attractive because of lowered liquidity and increased financial leverage.
The model also analyzes the firms Weighted-Average Cost of Capital (WACC), Return on Equity (ROE). The repurchase will cause the following effects:
WACC will decrease from a projected 12.49% to 11.98%
ROE will increase from 20.06% to 25.11%
The repurchase will also greatly benefit the shareholder in the following ways:
Earnings