An Introduction to Debt Policy and Value Essay

What remains to be seen however, is whether shareholders are better or worse off with more leverage. Problem 2 does non articulate us, because there we computed come in value of equity, and shareholders care about value per share. Ordinarily, come in value will be a good proxy for what is mishap to the price per share, but in the case of a relevering firm, that may not be true. Implicitly we assumed that, as our firm in problems 1-3 levered up, it was repurchasing nisus on the open market (you will note that EBIT did not change, so management was clearly not investing the proceeds from the loans in cash-generating assets).We held EBIT continual so that we could see clearly the effect of financial changes without getting them interracial up in the effects of investments. The point is that, as the firm borrows and repurchases shares, the total value of equity may decline, but the price per share may rise. Now, solving for the price per share may seem impossible, because we are dealing with two unknownsshare price and change in the number of shares piece price=Total market value of equity