1. If BBBY borrows $1,272,700,000, its bond rating will deteriorate. Would BBBY still be able to borrow at 4.5% if its bond rating were "junk"? Use the bond rating ratios table below in conjunction with Exhibit 7A to answer this question.
2. What capital structure do you recommend as appropriate for BBBY? Why? Answer in one or two paragraphs. (If you disagree with the 80% leverage proposal, recommend another capital structure for BBBY.)

Bond Rating Ratios	40% Proposal	80% Proposal
EBIT Interest Coverage	22.5	11.3
EBITDA Interest Coverage	25.5	12.7
Debt-to-Total Capital	40%	80%
Funds from Operations / Total Debt	72%	35%

Exhibit 7A: Standard and Poor's Three-Year Median Key Industrial Financial Ratios, 2000-2002 AAA AA BBB BB B EBIT interest Coverage (x) 23.4 13.3 6.3 3.9 22 1.0 EBITDA interest coverage (x) 25.3 16.9 8.5 5.4 32 1.7 FF Ototal debt (%) 2142 65.7 422 30.6 19.7 10.4 Free operating cash low total debt (%) 156.6 336 223 12.8 73 1.5 Return on capital (%) 350 266 18.1 13.1 11.5 8.0 Operating income/sales (%) 23.4 24.0 18.1 15.5 154 14.7 Long-term debt capital (%) (1.1) 21.1 33.8 40.3 53.6 72.6 Total de b/capital (%) 5.0 35.9 426 47.0 57.7 75.1 Number of companies 6 20 224 279 284 Average default rate, past 15 years" 0.52% 1.31% 2.32% 6.64% 19.52% 35.76% Source: Standard & Poor's * Based on the bonds atgnat ratings 0.1 0.7 3.2 (2.8) 1.2 8.8 78.3 91.7 56 54.38% 121