Bed Bath & Beyond Case Solutions

In: Business and Management

Submitted By jke2004
Words 1168
Pages 5
The business risk of BBBY can be categorized as medium to low. On the low side that is due to the fact that BBBY is a common goods company and the risk of default in the common goods industry is relatively low. But BBBY also has a lot of competitors with a higher market share and some of them even offer a higher ROE, like Best Buy (23.4%) and William Sonoma’s just a little above BBBY’s (19.5%), compared to BBBY ROE of 20.1%. The main competitors are chains of superstores such as Target and Best Buy. While BBBY has no debt on its balance sheets due to the conservatism of its management team, it invested a lot of its money in short-term securities and lately these investments weren’t profitable enough due to the low interest earned. Therefore, it is clear that the company needs a new strategy as to the future of their excess funds.
As mentioned above, we believe that the company does have a lot of excess cash that needs to be organized in a better way to provide its owners with a higher return. The company could pay out the excess cash as one time dividend or it could implement stock repurchasing. As for the first alternative, it is highly inefficient because if the company offers higher ROE than the current market does, it should keep the money in the company. Companies always do what is best for their shareholders.
Therefore, it leaves us with only one option – to repurchase some of the shares back from the public to increase the price of the stock that will remain outstanding. The analyst’s suggested ways to do so include 40% and 80% debt ratios.
As the company faces low business environment risk, it could afford to borrow more money. Therefore, we proceeded with the analysis of the extreme of 80% debt ratio first.
The value of leverage VL can be found as following:

VL =VE +VD, where VL –is a value of leverage; VE –is the value of equity; VD – a…...

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