If a company borrows to finance a share repurchase, the likely result is: An increase in the market value of the company An increase in the market value of debt offset by a decrease in the market value of equity An increase in the market value of equity offset by a decrease in the market value of debt. Can someone please help me understand this??
An increase in the market value of equity offset by a decrease in the market value of debt. The above assumes that the cost of debt is less than the cost of equity. Enterprise Value goes up deducting a smaller proportion of Net Debt.
I still don’t quite get this. Can you expand on that explanation?
how is it an increase in equity? Share repurchase - co is buying shares - which means the “treasury stock” contra account to Common Stock and Paid-in Capital is being created. So equity is being reduced. You have assumed debt - so Debt is increasing. Isn’t that the answer => increase MV(Debt), decrease MV(Equity) offsetting each other. Also balances A=L+E L Up, E Down.
Obtain debt to repurchase equity, reduce amount of equity, debt values increase to offset the reduction in equity
An increase in the market value of debt offset by a decrease in the market value of equity They’re decreasing shares outstanding, and paying for it with debt. Increase Debt, Decrease Equity.
makes sense now, thanks a lot