Notes: Repurchasing Shares and Issuing New Debt

777 Words Feb 1st, 2018 3 Pages
How The firm can increase leverage by issuing debt and repurchasing outstanding shares ? Explain when the company uses this case? How will that benefit the company and investors?
Repurchasing shares and issuing new debt increases a firm's leverage by increasing fixed costs (through interest and premium payments on the debt) and decreasing the number of shares/shareholders, which increases the value of all shares (all else being equal) yet which over the long-term magnifies the changes in share price (Bierman, 2003). This would be advantageous to the firm and to shareholders at a time when revenue and profits re expected to be high, as the consolidated equity will result in higher per-share earnings (good for investors) and abundant cash flow for the company to pay off fixed costs (including the new debt) and to reinvest in further growth and other company areas (Bierman, 2003).

7. The firm can decrease leverage by issuing new shares and retiring outstanding debt? Explain when the company uses this case? How will that benefit the company and investors?
Issuing new shares and moving to retire outstanding debt reduces leverage reduces the degree of exposure and magnification that the company will experience due to cash flow and other economic fluctuations-by reducing fixed costs and spreading the exposure around to a wider pool of investors (Bierman, 2003). This would be most advantageous during a year when it is expected that there will be a tightening of…
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