Reference no: EM133240832
This case allows us to consider the problem of "excess cash" faced by many companies these days
• Cash balances are on the rise: Large U.S. firms hold $3 Tri in cash today, 5× the amount held 10 years earlier
• Investors often see this as "inefficient balance sheets" and demand stock repurchases
• CFOs must decide what to do with excess cash and modulate firms' capital structure
• The case allows us to consider factors that are important when setting capital structure: Tax shields, costs of financial distress, credit ratings, etc.
Put yourself in the shoes of BBBY's CEO, Steven Temares
• It's April 2004 and you're about to decide what to do with the $400 million "excess cash" in the firm:
1 Keep it?
2 Pay it out?
3 Issue debt?
4 All of the above?
• What factors should you consider when choosing the "optimal capital structure"?
• Note BBBY's non-cancellable leases (tax-deductible pmts)
- They look and behave a lot like "secured debt" claims
• An excel spreadsheet is provided to help you with the case
Consider a concrete program...BBBY combines:
1. Use $400 million excess cash, and
2. Borrow funds (at 4.5%) to conduct a share repurchase
• Under the above program, compute the PV of tax shields and estimate the bond ratings for the following D/E ratios:
20%, 40%, 60%, and 80%
- The corporate tax faced by BBBY is 38.5%
• The rationale and details of your response must be given in a professional memorandum prepared individually
• This is your final course task, be as complete and thorough as you can in recommending a specific policy!
Attachment:- Case - BedBathBeyond.rar