Question

Ques. Carefully explain the consequences of a company that company raises the same amount of capital via debt market or stock repurchases. Why will their total return be the same?

Answer 1

The consequence of a company that raises the same amount of capital via debt market or stock repurchases would be as follows:

Number of share of equity will decrease

Decrease in the Equity of the company

The Earnings will reamin same

The total return of the company remains the same under both the situations because:

Uder debt financing, the interest cost increase and reduce the earnings

Under Shares buyback the earrnings remain same but the number of shares reduce resulting iinto the same return under both the options.