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?
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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
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