Bed, Bath and Beyond

Bed, Bath & Beyond: The Capital Structure Decision

Advanced Corporate Finance

September 15th, 2014

Short introduction:

BBBY was founded in 1971 by Warren Eisenberg and Leonard Feinstein. At first they opened two specialty stores. In 1985 the company opened the first superstore. With some good strategies BBBY differed from its competitors. The main factors were: Good customer experience leading to high store productivity, decentralized store control, high margins and low cost structure.

Question 1

D= Debt Interest rate=4.50%

E= Shareholders equity Corporate tax rate=38.50%

Excess cash($)= 400,000(₁) Perpetual debt policy

Scenario 1 (35%) :

(D+E) ($)=1,990,820(₂)-400,000=1,590,820

D/1,590,820=0.35

D($)=556,787

E($)=1,034,033

Rate for interest income is 10,202(₂)/866,595(₂)≈1,1773%

Interest income($)=866,595-400,00=466,595- 466,595×1,1773%=5,493

Interest expense($)=4.5%×556,787=25,055

Operating profit($) | 639,343 |

Interest income($) | +5,493 |

EBIT($) | = 644,836 |

Interest expense($) | +(25,055) |

Profit before taxes($) | =619,781 |

(PV) tax shield($)=619,781×38.50%=238,616

Scenario 2 (85%) :

(D+E) ($)=1,990,820-400,000=1,590,820

D/1,590,820=0.85

D($)=1,352,197

E($)=238,623

Rate for interest income is 10,202/866,595≈1,1773%

Interest income($)=866,595-400,00=466,595- 466,595×1,1773%=5,493

Interest expense($)=4.5%×1,352,197=60,849

Operating profit($) | 639,343 |

Interest income($) | +5,493 |

EBIT($) | =644,836 |

Interest expense($) | +(60,849) |

Profit before taxes($) | =583,987 |

(PV) tax shield($)=583,987×38.50%=224,835

(₁) $ are in thousands

(₂)See Exhibit 8 for the values

Question 2

Scenario 1 (35%)

In the previous question we found that the profit before taxes was $619,781.

The taxes are 38,5%, so 0,385*619,781= 238,616

Profit before taxes | 619,781 |

Taxes |...