Bed Bath & Beyond Case Study Solution
Q-2: Explain BBBY’s current capital structure choice in the context of Trade-off and Pecking Order theories. Are there other factors you could think of that effect BBB’s capital structure choice? Can BBBY internally fund all of its investment needs and expansion plans?
Analysis of the company's capital structure shows that its leverage ratio is much lower than the leverage ratio its competitors have. Due to the enormous growth of the industry and low-interest rates in the market; loans have increased tremendously in the key businesses operating in home furnishing industry. For example, from 2002 to 2003; the liabilities of Linen N Things increased from $ 482 million to $ 730 million. All the companies wanted to take full advantage of low borrowing costs and profitable growth opportunities. However, Bed and Bath had so much money that even after spending an excessive amount of money on expansion; the company would still be left with $ 400 million. The industry is very competitive and the company shouldn't let its competitors take advantage of these conditions.
Therefore, Bed and Bath must use its cash-rich position to further strengthen its leadership in the industry. Although increasing the leverage of the business will affect its credit rating; the business must borrow as long as the benefits of borrowing outweigh the borrowing costs. The current financial situation of the firm and the low costs of the loans offer good opportunity for the firm to apply for a loan. An optimal loan amount will increase the overall value of the business because the company's ROA is much higher than its borrowing costs.The company’s management is considering to increase the number of local as well as international stores. Apart of this, the profits from the stores with large cash and cash equivalent in the financing of the company,are more than the funds required.
Interest rates is a matter of concern for the company, because decreasing interest rate reduces the return on equity, so the management wants to increase its return on equity and earnings per share while maintaining its credit ratings.There are some alternatives available to the company for doing so. Since the funds are more than the company's current needs; in this case, the share repurchase plan based on the number and ratio of shares to be bought back, is the best option available to the company. Your debt. These are the main factors to consider when buying back the stocks and lending. Currently, the company does not use any credit lines, so its credit rating is high and the company can use this credit rating to borrow at lower interest rates.
It is expected that the company will be able to use the credit limit at a lower interest rate of 4.5% and increase the borrowing rate to the capital structure of the company by taking advantage of tax protection. Leverage will increase the company's financial risk. Using 20% debt in the company’s capital structure, is expected to be at an acceptable level as it would not affect the credit rating of the company and the leverage ratio will not increase the financial risk of the company. The comparable companies use a greater borrowing facility. However, using a 20% credit line will not increase the company’s return on equity.............
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
Exploring New Business Opportunities at LoJack
Hayman Capital Management
Lincoln Industries
Differences at Work: Allie (B)
Restructuring of Chinas Automobile Industry after Chinas Entry into WTO
Face-to-Face Communication: Is It Really Necessary in a Digitizing World
Ottawa Devices Inc. (B)
Atlantis-Biovent Negotiation: Confidential Instructions for Biovent
Sullivan’s Flooring concept
Leadership in crisis
