MEMORANDUM

To: Steven Temares, CEO, Bed Bath & Beyond

From: Corporate Finance Intern

Date: April, 2004

Subject: Capital Structure Decision

As you know, Bed Bath & Beyond has $400 million in excess cash. We need to decide what to
do with this money. We have four options:

1. Keep it.
2. Pay it out to shareholders (through share repurchase or dividend)
3. Issue debt.
4. A combination of the above.
To arrive at the most optimal decision for Bed, Bath, and Beyond, I considered the following
factors;
 Tax shields
 Cost of financial distress in the event of a default
 Impact on credit ratings
 Interest rates
 Impact on earnings per share
 Impact on market value of equity
 Probability of repayments
Recommendation: BBBY should issue debt of $636 million with a 10-year tenor, and in addition
use its excess cash of $400 million to repurchase shares as a form of return to shareholders
Rationale
1. Current low interest rates of $28.6 million annually
2. At a projected 32.2% 5-year growth in net income, BBBY is well positioned to repay its debt
without default and still pursue other organic and inorganic growth opportunities
3. For most of the ratios, BBBY is currently in a safe zone even with debts, and issuing debt will
not constitute a significant threat to its credit rating.
Attached is the calculation supporting this recommendation.