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Cost Of Capital Essay

883 words - 4 pages

Bed Bath and Beyond's Business Risk
Bed Bath & Beyond Inc. is a nationwide chain of 575 retail stores selling domestics merchandise (bed linens, bath items, and kitchen textiles) and home furnishings (kitchen and tabletop items, small appliances, and basic house wares). In 2003 Bed Bath and Beyond reported annual revenues (gross profit) of approximately $1.8 billion, net income of $339 million and net sales of $4.5 billion, representing 22% growth in revenue and 32% growth in income as compared to the previous year. In addition to the 575 Bed Bath and Beyond stores, BBBY also owns 30 Harmon Stores, a discount health, and beauty aid retailer, and 24 Christmas Tree Shops, a retailer of ...view middle of the document...

Bed Bath and Beyond Cash and Debt-to-total Capital
While BBBY's balance sheet is strong, there are risks of having too much cash. Namely the risk of not attracting or keeping investors, because of their desire to maximize their returns. When an investor sees to much cash on the balance sheet, they may question the company's ability to manage their capital structure efficiently, and therefore question their ability to maximize shareholder value. While BBBY uses their cash for store growth and small acquisitions, they should also be focusing on using their cash to increase shareholder value.
If BBBY were to use $400 million in excess cash and $636.3 million in borrowed funds to repurchase it's shares they would increase their basic earnings per share from 1.35 to 1.41 and their diluted earnings per share from 1.31 to 1.37 (exhibit 2). If BBBY were to use $400 million in excess cash, and borrow $1.27 billion to repurchase their shares, they would decrease their basic earnings per share from 1.35 to .70 and their diluted earnings per share from 1.31 to .72 (exhibit 2).
Repurchasing shares with a 40% debt to total capital ratio would increase shareholder value, however repurchasing shares with an 80% debt to total capital ratio would significantly decrease shareholder value and therefore would not be advisable. Increasing debt increases shareholder value to a certain point. As this proforma shows, the point of diminishing return is somewhere between 40% and 80%.
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