An Introduction to Debt Policy and Value Essay Example for Free

An Introduction to Debt Policy and Value set aboutWhat remains to be seen however, is whether shareholders are better or worse off with more leverage. Problem 2 does not tell us, because there we computed total shelter of uprightness, and shareholders care about value per share. Ordinarily, total value will be a good proxy for what is happening to the expense per share, but in the episode 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 well-worn 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 constant so that we could see clearly the effect of financial changes without acquiring them mixed 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 search impossible, because we are dealing with two unknownsshare price and change in the number of shares Share price=Total market value of equity