case Bed, Bath & Beyond

With different level of the debt of the company according to Exhibit 3, we would predict by comparing to its peer Warner. Lambert Company at 32.4% debt to total capital ratio still maintain at weak AAA level. AHP had much better financial performance e.g. Earnings per Share and Return on Equity. With 50% Debt to Total Equity ratio, AHP may receive lower rating at AA level and we do not expect them to go lower than BBB rating even with 70% Debt to Total Equity

Company does not have big amount of debt to pay. In 1994 its outstanding debt is only 36.4% of its total assets which is a healthy rate. Its current assets are higher 2.4 times than its current liability. Also company has no outstanding interest to pay. Price earning ratio of 42.80 is highest among the competitors. (Pls. see exhibit 2, 3&4) for details. So we can safely conclude that BBBY has great potential to sustain.

Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

BBBY will need to trade off business risk against financial risk. They operate in an industry with fairly low business risk however BBBY's operating leverage is high which could indicate a higher than industry business risk if they are not cognizant of managing their fixed costs. In addition, BBBY's debt to total asset ratio is higher than their industry. Both of these indicate a high business and financial risk. If BBBY were to recapitalize to 80% debt to total capital it would only increase their financial risk and reduce shareholders earnings per share. Therefore the recommendation for a capital structure for BBBY would be to add more than the 40% debt to total capital but not more than 80%.

As you can plainly see, by making use of leverage you can magnify not only your profits, but should things take a turn for the worse, your losses as well. Think about it this way, the greater the level of leverage you use, the greater the level of risk you take on. What this means is that leverage can

This represents a 7% increase in stock price. Further, the additional leverage and return of excess cash to shareholders will significantly increase ROE. If the market determines that an 80% debt capital structure is feasible for BBBY, then we will expect further capital gains as investors applaud shareholder friendly policies and re-examine EPS estimates. However, if top line growth and same store sales growth continue to trend downward, investors may become skeptical of BBBY management’s ability to continue generating over 30% EPS growth, and thus question the ability of the company to service its debt in the future.

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.

Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.

Pro-forma income statement and key credit rating determinants are shown in Exhibit 2 and 3 respectively. Remaining share no. of 158.3m after repurchase is based on proportional value addition distribution between cash-out and remaining shareholders and this number is inserted to calculate earning per share and corresponding immediate share price change after announcement of repurchase program. According to Exhibit 3 and industrial average of relevant grades, only fund flow/ total debt and total debt/ capital measures are not comparable with A credit rating. Considering EBIT and EBITDA interest coverage are two most important criteria and equity market value is so substantially different from book value which leads to a healthy

Increased leverage would increase the risk for the shareholder. This is due to the fact that an increased amount of debt would increase the financial return that investors expect. For example, if a company has no debt and posts better than expected earnings, the equity holder would get all of this benefit. If the company had some debt and posted better than expected earnings, the bond holders would get a fixed payment as usual, and shareholders would still enjoy increased profits; the problem arises if worse than expected profits were shown by Kelly Services. If Kelly Services had no debt and posted bad earnings, then the equity bears all the risk in that situation. However, if Kelly

In order to gain information about the wants of the customers in each region, Macy should collect enough data from its Transaction Process System. The transaction process system will enable Macy’s to view what is being bought in each region. This enables for more accurate data to be implemented in the information systems. When data is collected form TPS, then management can collect the statistical data from the market and analyze them using analytical software applications, such as Hadoop. Another way that they can collect information for their information systems would be to create online campaign, a survey, whatever is available.

With this, we can then find each of the costs for equity by averaging them within each of the bond rating categories. This showed a very flat performance in cost of equity. I we compare that to the market beta, our answer for CAPM would change from the 9.89% to the 11.03%. According to exhibit 8 in the case, a cost of equity of 11.03% is between a BBB and BB bond rating. Therefore, if they were to repurchase stock from investors, there share prices would in theory go up because they are investing more and more money into the company.

1. Why did Mexico make such a good proving ground for Wal-Mart’s foreign expansion strategy?

Walmart is the world’s largest retailer with more than 8,400 stores globally and is now considering going green. Walmart moves massive amounts of products and uses a lot of other resources to operate its business and now they are trying to transform itself into a company that is seen as environmental friendly.

Currently, the company has high leverage since the debt to equity ratio is high. Though the company has significantly reduced its debt over the past years, but it is still highly financed by debt rather than equity.