This case allows us to consider the problem of excess cash faced by many companies these days?
Question:
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 (check attachments)
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?
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba