An Introduction to Debt Policy and Value Essay Example for Free

An Introduction to Debt Policy and Value EssayWhat remains to be seen however, is whether sh atomic number 18holders are better or worse off with more leverage. Problem 2 does not tell us, because there we computed total note rank of equity, and regionholders care about value per share. Ordinarily, total value will be a good proxy for what is happening 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 stock on the open market (you will note that EBIT did not change, so vigilance 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 getting 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 p rice per share may seem impossible, because we are dealing with two unknownsshare price and change in the number of shares Share price=Total market value of equity