Question

Raising corporate debt to fund a stock company repurchase program is not a good idea. Evaluate...

Raising corporate debt to fund a stock company repurchase program is not a good idea. Evaluate the validity of this statement and support your answer.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

A company may buyback its shares by using debt. This process is also called leveraged buyback.

When the buyback is financed with borrowing, it can hurt credit ratings of the company. And it will drain cash reserves when there are more debt obligations. Though this method is more efficient because of the tax advantage of the debt, the debt has to be repaid on time. Hence the debt liability of the company is increasing. The company has to meet larger interest and principal payments as a part of leveraged buyout. In short using debt to fund repurchase program is not a good idea.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Stock repurchases There are a number of reasons why a firm might want to repurchase its...
Stock repurchases There are a number of reasons why a firm might want to repurchase its own stock. Read the statement and then answer the corresponding question about the company’s motivation for the stock repurchase: Happy Orange Storage Company’s board of directors has decided to repurchase some of its stock on the open market because it wants to increase the company’s debt-to-equity ratio. What is the company’s motivation for the stock repurchase? To adjust the firm’s capital structure To acquire...
7. Stock repurchases There are a number of reasons why a firm might want to repurchase...
7. Stock repurchases There are a number of reasons why a firm might want to repurchase its own stock. Read the statement and then answer the corresponding question about the company’s motivation for the stock repurchase: Smith and Martin Co.’s board of directors has decided to repurchase some of its stock on the open market because it wants to increase the company’s debt-to-equity ratio. What is the company’s motivation for the stock repurchase? To adjust the firm’s capital structure To...
Starbuck's is a good example of a company that started out with a simple idea and...
Starbuck's is a good example of a company that started out with a simple idea and expanded globally. This is why properly developing and implementing a branding strategy can have a huge impact on the success or failure of your business. Having the right promotional materials, effective marketing messages and visual designs for both online and offline will help you increase sales leads and sales conversions. If you market with sales letters, fliers, brochures, catalogs or on the Internet, then...
Bruin Industries just issued $350,000 of perpetual 6.1 percent debt and used the proceeds to repurchase...
Bruin Industries just issued $350,000 of perpetual 6.1 percent debt and used the proceeds to repurchase stock. The company expects to generate $161,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 11.1 percent and the corporate tax rate is 25 percent.    a. What is the value of the company as an unlevered firm? (Do not round intermediate calculations...
Bruin Industries just issued $275,000 of perpetual 6 percent debt and used the proceeds to repurchase...
Bruin Industries just issued $275,000 of perpetual 6 percent debt and used the proceeds to repurchase stock. The company expects to generate $126,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 12 percent, and the corporate tax rate is 34 percent. A. What is the value of the company as an unlevered firm? (Do not round intermediate calculations and...
Bruin Industries just issued $415,000 of perpetual 7.4 percent debt and used the proceeds to repurchase...
Bruin Industries just issued $415,000 of perpetual 7.4 percent debt and used the proceeds to repurchase stock. The company expects to generate $200,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 12.4 percent and the corporate tax rate is 23 percent.    a. What is the value of the company as an unlevered firm? (Do not round intermediate calculations...
The capital structure of Jolly Jellybeans Corp. is as follows: Debt: 40% Preferred stock: 10% Common...
The capital structure of Jolly Jellybeans Corp. is as follows: Debt: 40% Preferred stock: 10% Common stock: 50% Additional information about the company is also given: Price of common stock $35 Dividend (common stock) $1.25 Growth rate (common stock) 5% Price (preferred) $80 Dividend (preferred) $6.25 Flotation cost (preferred) $2.00 Bond YTM 8% Corporate tax rate 25% Compute Jolly’s WACC. (Hint: Start with computing the costs of each component in the capital structure.) State your answer as xx.xx% (for example...
Spam Corp. is financed entirely by common stock and has a beta of 1.60. The firm...
Spam Corp. is financed entirely by common stock and has a beta of 1.60. The firm is expected to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 7.60 and a cost of equity of 13.16%. The company’s stock is selling for $28. Now the firm decides to repurchase half of its shares and substitute an equal value of debt. The debt is risk-free, with an interest rate of 6%. The company is...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
5. Solving for the WACC The WACC is used as the discount rate to evaluate various...
5. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACC is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT