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Under what circumstances would it make sense to issue new debt to buy back equity shares?...

Under what circumstances would it make sense to issue new debt to buy back equity shares? Be specific.

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Answer #1

A company may buyback its own shares when it estimates that the market is underpricing the stock price. The company chooses to buyback shares by issuing new debt. Buying back shares with new debt benefits the company because the interest paid on the debt is tax deductible.

It makes senes for the company to buyback shares by issuing new debt especially when the company is underleveraged and there is some room for debt financing. Note that debt financing is cheaper than equity financing.

As long as the debt is not too much and the company has a reason to believe that its shares are underpriced, issuing new debt to repurchase shares has benefits. It may lower the overall risk of the company.

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