Bed Bath and Beyond’s main source of risk would be its amount of excess cash or growing cash balance of the company. At the end of the 2003 fiscal year, it was estimated that Bed Bath ; Beyond’s cash balance was $400 million higher than its ongoing requirement for growth and operations. This implies that there would be a general concern regarding deteriorating return on equity, because interest earned on investments had been subject to declining interest rates. The company definitely has excess cash in its books. In 2003, they ended with $867 million in cash and short-term securities even after a $200 million all-cash acquisition. Also, BBBY had no long-term debt on its balance sheet.
I personally believe that they should increase their leverage by issuing more debt and paying out excess cash to increase potential ROI, and to raise earnings per share. The company might face different levels of risk depending on different proposed levels of debt. If you consider a 40% debt-to-total capital proposal, then the company would use $400 million in excess cash and $636.3 million in borrowed funds in order to be able to repurchase its shares. Using a risk perspective, lower debt ratios are better than higher ones because the interest on a debt must be paid no matter the measure of business profitability. And if you consider the 80% debt-to-total capital ratio by adding more debt, the company would borrow $1.27 billion and use these funds along with the excess cash to execute a share repurchase. Higher debt-to-total capital ratios in general make it more difficult to borrow money, especially when the company is over-leveraged. But in this case, there is no risk of compromising operations since the company has excess cash.
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When a company has too much debt, operations might be compromised if cash flow dries up, so this is definitely not the case for this company because of the amount of cash that they possess. Using the 80% proposed plan will definitely benefit shareholders and the company because of the fact that the company might enable a share repurchase program. Enabling this program would reduce the number of shares outstanding for the company, but will give shareholders more power and value if they hold shares from Bed Bath and Beyond.
Capital markets benefits shareholders and companies that work with long-term debt. Some of the advantages of long-term debt include stability, flexibility, low maintenance and monitoring costs , etc. If the company increases its debt-to-total capital ratio to 40%, then the capital market in general will react positively to this change because it would make the company more attractive in the stock market.
