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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.

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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.

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