Bed Bath and Beyond: Capital Structure Decision (HBR Case Study)
Bed Bath & Beyond (BBBY) was founded in 1971 by Warren Eisenberg and Leonard
Feinstein. BBBY held its initial public offering in June 1992, on the NASDAQ exchange. The company utilizes the “big box” retail concept and focuses its product offerings around domestics merchandise and home furnishings. Since its IPO BBBY has been favored by equity investors and long considered one of the best performing retail companies. They have never missed an earnings estimate and have experienced a fortyfold increase in stock price from the original $17 per share IPO.
The company introduced its ﬁrst superstore in 1985 and have since underwent large scale expansion operating 575 stores by the end of the ﬁscal year 2003. BBBY also …show more content…
With this in mind, the default rates outlined (see Appendix one) should be a close estimate of what BBBY would face when they take on debt. Direct costs associated with ﬁnancial distress are historically small. The indirect costs, such as loss of suppliers, customer, and leases can be quite substantial. Using the high side of an industry estimate, 20% of total assets, to reasonably account for what BBBY could lose due to ﬁnancial distress. For the optimal D/E ratio of 0.60 we have a present value of ﬁnancial distress equal to $127,432,000 and a present value of tax shield of
$400,362,000. As we move to a higher D/E ratio we see the marginal cost of ﬁnancial distress and marginal beneﬁt of the tax shield converge.
Case 2: Bed Bath & Beyond
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The decision to repurchase shares and take on debt is overall positive news to the shareholderʼs. They will receive a special repurchase capital gain and enjoy an increased upside on returns due to the increased beta of the company. The total capital structure of the company shifts from being totally equity funded to