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Share Repurchase
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Tax shield effect
Just to add to this, when you remove shares from the market by issuing debt, you are adding more leverage to the capital structure of the company which increases the company's cost of equity. In an M&M world this increase in cost of equity would exactly offset the benefit from adding lower cost deb...
Just to add to this, when you remove shares from the market by issuing debt, you are adding more leverage to the capital structure of the company which increases the company's cost of equity. In an M&M world this increase in cost of equity would exactly offset the benefit from adding lower cost debt financing to the capital structure. If we assume taxes are deductible, however, then the true economic value from a share repurchase should be equal to the incremental tax shield created from altering the capital structure. This also assumes you are buying the shares back at a fair value. If shares are trading below intrinsic value, this would also create value. Do you agree with this assessment?
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by Jeff H.
added 6 years ago
