An Introduction to Debt Policy and Value Essay

What carcass to be seen however, is whether sh beholders are better or worse off with more leverage. caper 2 does non tell us, because there we computed total rank of equity, and shareholders care active range per share. Ordinarily, total value go away be a good representative for what is happening to the terms 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 stock on the open market (you will grade that EBIT did not change, so management was distinctly not investing the proceeds from the loans in cash-generating assets).We held EBIT constant so that we could see intelligibly the effect of financial changes without getting them motley up in the effects of investments. The extremum is that, as the firm borrows and repurchases shares, the total value of equity may decline, but the outlay per share may rise. Now, solving for the footing per share may seem imposs ible, because we are dealing with two unknownsshare price and change in the number of shares serving price=Total market value of equity