Bed Bath & Beyond Case Solution
Q-1: Do you think BBBY’s current capital structure is optimal? Discuss.
Bed Bath & Beyondis doing well in the industry, as some of key success factors have helped the company to grow sustainably in terms of revenue, profit margin, market share and the number of stores. Therefore, in past years, the company-experienced a remarkable success. The sales volume of the company and its financial performance helped it in generating enough cash from its operations. The company offers a large number of products to its customers, to provide a one-stop service to its customers, which helps the company in achieving customer loyalty, which is the key success factor for the company. (Raviv, 2007)
Increasing sales volume, increasing profit margin and increasing customer volume, market share and the number of stores are cited as important strengths of the company when it comes to giving an advantage to the company over its customers and competitors, which shows that it is also important for the job market opportunities that can help the company to grow sustainably. Moreover, the company prefers to expand its operations for broader market coverage and its success. Therefore, the financial situation of the company is positive and its financial statement shows an excessive amount of cash.
These excess cases raises the concerns of the company and its managers over the efficient use of excess cash regarding the company’s performance and its executive performance. This raises furthers concerns because the company’s management is unable to effectively manage the company’s capital structure in order to generate positive returns.In addition to this excess cash position; the return on equity investment and earnings per share also decreased, putting pressure on inventors, and the investors have started to lose their confidence on investing in Bed Bath & Beyond, which can lead to the disposal of the investment in the company.
In the past, the company showed positive returns for its investors, and from that return and positive cash generations; the company successfully acquired numerous companies in 1993.These successful acquisitions boosted BBBY’s net earnings of $ 15,960. The company is getting bigger and has reported the net earnings of $ 399,470, in the fiscal 2004.For this reason, BBBY should consider implementing a policy that could lead to an increase in the shareholder’s value, which will further lead towards regaining the investor’s trust regarding making investments in BBBY.
The company’s balance sheet shows that BBBY has a cash surplus of approximately $ 400 million and the balance sheet also indicates that the company has an opportunity to raise debt of the company, to about $ 636.3 million, which might be due to the repurchase of existing shares. Therefore, if BBBY chooses to adopt this policy, it will improve the shareholder’s performance and would increase the earnings per share. Also, by not disposing of their investments in BBBY, they would raise investor’s morale,and the investors would then be willing to keep their existing shares in the company.
Also, the company opted to increase its debt to equity by 40 percent or 80 percent. Therefore, if the company chooses to increase its debt by 40%; the debt would become about $ 636.3 million, but if the company chooses to increase its borrowing capacity by 80%; the debt would be$ 1.27 billion. This borrowing capacity can additionally be used to repurchase the existing shares. If the business is making debt; the benefit of issuing debt is that it reduces the tax-deductible-portion of the income, but alternatively, this affects the business’s interest coverage rate as it would get reduced……………..
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