In the text, it says that share repurchase would support the price for a stock, as there would be fewer shares outstanding for the same amount of total market value.
However, share repurchase by the firm would also increase the firm’s financial leverage by increasing debt proportion of the capital structure. My question is how would this be possible if the total market value of equity stays constant?
It seems that both statements contradict each other. I could be wrong too.
You may be confusing the market value of equity with the book value of equity.
Book value will decrease; market value may not (or, at least, may not decrease as much).
Is one way to explain how the market value of equity would not get changed via a share repurchase is due to the fact that a share repurchase (in theory) should not have any affect on the market value of the company (as would exist under MM prop 1)?
Not sure if there is a more intuitive way to explain this, showing how market value should be unchanged due to a share repurchase.
When a company buys its own shares, it’s a signal that the company believes that its shares are a good investment; perhaps that they’re underpriced. The market price per share may well increase, even though the book value per share will decrease.
I’m not sure that that has anything to do with Messrs. Modigliani and Miller. Or intuition.