Bed Bath & Beyond

I recommend that Bed Bath & Beyond adopt a structure of 40% debt-to-total capital. This new capital structure will allow for the repurchase of 27 million shares of its outstanding stock at a price of $38.26 per share. The total cost of the repurchase will be $1.03 billion, financed by 400 million excess cash and 636 million in borrowed funds.

At present, the company has an extremely high level of excess cash. This is a result of its over liquidity and from being under leveraged. I created a forecast model exploring the 2005-07 financial situation. The model displays the following critical information:

 In terms of liquidity, the repurchase will have the following effects:

 Current Ratio will decrease from 2.55 to 1.11

 Quick Ratio will decrease from 1.24 to 1.13

 Cash Ratio will decrease from 1.12 to 0.33

 In terms of financial leverage, the repurchase will have the following effects:

 Debt Ratio will increase from 0.30 to 0.57

 Debt/Total Capital will increase from 0.43 to 0.88

By financing the repurchase through a 40% debt structure, the company becomes less attractive because of lowered liquidity and increased financial leverage.

The model also analyzes the firms Weighted-Average Cost of Capital (WACC), Return on Equity (ROE). The repurchase will cause the following effects:

 WACC will decrease from a projected 12.49% to 11.98%

 ROE will increase from 20.06% to 25.11%

The repurchase will also greatly benefit the shareholder in the following ways:

 Earnings