Bed Bath and Beyond

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Suggested Study Questions

1. How would you characterize the business risk of Bed Bath & Beyond? Review their financial performance. Business risk in the case of BBBY is low if you only consider that the products they sell are produced by name brand companies, so any products needing repair could be sent directly to the name brand company. By passing BBBY and that BBBY has no control over the quality of the products they sell and that there are no significant switching costs. However, their degree of operating advantage is high which would indicate high business risk. If management adds fixed operating costs to their business operations, without an increase in sales, the firm's profit declines and it
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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%.

3. What capital structure would you recommend as appropriate for Bed Bath & Beyond? How much financial risk would Bed Bath & Beyond face at each of the proposed levels of debt? Capital Structure for Bed Bath and Beyond An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.
BBBY will need to trade off business risk

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