Justifying Debt should Accepted or Not
The debt acceptance, justification is to maintain the excess cash which could be facing in the negative term. This excess cash would help the company to regain their position which was the leading position in the market and their competitors. The calculation in the Excel sheet shows that if a company uses the 40% debts, and$400 million cash for the repurchase of shares then it would change the number of the shareholder in declining term which would be 28009 as compared to 80% which would reduce by 45135 the number of shares. The EPS will also show the positive term for future perspective. The return on equity will also show the good percentage, but its financial leverage will be higher that it would be red alarming for the company. Moreover, it would increase the interest cost that creates the low profit for the company. This supports the justification of opting debt..
Implementation of Debt Effect
The implementations are done on the excel sheet with present value of tax shield, bond rating and EPS effect and are also depicted in the “Appendix A, B and C”. The interest coverage ratio is 45.04 times in 20%, 22.5 times in 40% 15.01 times in 60% and 11.3 times in 80%, whichmeans that the earnings before interest and tax are gradually increasing. In all cases, the interest coverage ratio is declining the company’s net earnings that will result in reducing the net profit of the company. Moreover, it would also affect the credit rating on negative side. If a companyprovides special dividend then it willcause the companypaying their cash somewhere else where there is no possibility of the returns. Therefore, companies should implement the financial leverage of 40%which is beneficial for the company as well as for their capital structure.
Conclusion
The conclusion of the company is to adopt the debt financing and revise its capital structure through maintaining the financial ratio of 40:60 percent debt to equity. The reason for the 40% is that, it would stable the situation of the capital structure with the practical knowledge of the financial management. Of the 40% the interest coverage ratios are about to 22 times as compare to the 20% debt position in which the 50% isseen as the double of it. This would result in better earning of the enterprise, but lower on tax shield. Furthermore the 20% debt option is feasible in the tax shield, but it would affect in the earnings of the organization. It is recommended that “Bed Bath & Beyond” has revised its capital structure and implement the debt financing with having the range of 20% to 40%. The beneficial debt financing capacity would be 40% and second best would be 20% of the enterprise. The reason is that it would not reduce the net earnings of the company with comparison to other debt financial leverage ratios. By revising the debt capacity toward to 40% to 20% the bond rating will be the same which is “AA” that is more concern of the company. For understanding all the criteria of the case report refer the excel sheet and appendices................................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
