why does the EPS decrease when a firm borrows money to repurchase its shares when the after tax cost of debt is greater than the E/P?
Trending Content - Investment Banking Forum
Career Resources
WSO Free Modeling Series - Now Open Through
July 31, 2026
9 Free Financial Modeling Lessons
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
+Bonus: Get 27 financial modeling templates in swipe file
+Bonus: Get 27 financial modeling templates in swipe file
High Finance Applications
Guaranteed
Get at least one offer GUARANTEED
- 1:1 support
- 92% success rate
- 2,000+ mentor network
- Unlimited Live bootcamps
- AI for resume + LinkedIn
- Networking automation tools
- HireVue simulation tool
- Full course library
- Private Slack community
- 20hrs of mocks
- + much more...
since no one has attempted this yet, i will give it a shot. borrowing money will add interest on the income statement, decreasing earnings available to distribute to shareholders. if the after tax cost of debt is greater than the earnings yield i think that means the company is buying the stock back when it is overvalued (although generally no one would do that), so the earnings part of eps equation is going down faster than the # of shares part.
thats my best guess, hopefully someone more knowledgeable comes around and sets things straight...good question though!
basically paying more for the debt you are raising, to buy back the shares, than the amount of earnings you are getting, on the dollar; so it makes sense that you would be decreasing your eps, not increasing it.
versus, you're getting more earnings on the dollar per the cost you are paying to buy back the stock in the first place, and your eps naturally increases.
don't know if it is helpful, this is how i think of it at first glance
Incidunt at et incidunt occaecati voluptatum. Aut corrupti quia dignissimos rerum eos. Facere excepturi omnis consequuntur dolorem nam.
Id voluptate placeat quibusdam sit dolores. Alias impedit placeat optio numquam non alias et unde. Placeat sit perspiciatis necessitatibus aut voluptate sit. Cupiditate eum iusto a porro aut voluptas. Non alias ducimus aperiam voluptatem incidunt.
Reiciendis totam delectus et dolores. Dolores commodi consequuntur illo porro voluptatem. Rerum aut minima quia eum ratione soluta.
Saepe repellendus recusandae aut harum. Et est incidunt illo dicta dolorum asperiores eligendi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...