Question

What do you conclude as an investor if a firm sells stock and uses the proceeds to repurchase some of its outstanding bonds?

Answer 1

Since companies tend to issue equity following unusually large increases in their stock prices and tend to repurchase bonds when interest rates are lower than their current bonds outstanding, the investor would conclude the stock prices for the firm have recently increased and interest rates have decreased. Another argument would be the firm is trying to move towards its target leverage zone and will issue new equity when debt ratios get too high. This action might also signal that the firm's shares are overvalued.