IBD Interview Question: Leverage Recapitalization accretive or dilutive?
Is Leverage Recapitalization (two ways: taking on debt and buying back shares or taking on debt and giving out as dividend) Accretive or dilutive?
Maybe someone else can chime in, but I would take a look at the cost vs the yield of the shares.
Cost of financing = after-tax kD Yield of Shares (assuming it is a private company) = Assign a valuation on a per share basis (say, estimate Equity value and divide by # of insider shares).
If after-tax kD > than the EPS / Estimated Price per share, then it is dilutive. Other way = Accretive.
For dividend purposes, it would be dilutive. EPS are lower due to the fact that you have additional interest expense, while # of shares stay constant. Dilutive on the I/S doesn't mean it's not beneficial for the stockholders, though, as they are getting their cash earlier and such act is probably pushing their IRR up.
For taking on new debt to buy back shares, this is what I said during my interview: because additional debt leads to interest expense, which decreases NI; on the other hand, the number of shares also decreases. In this way, both the numerator (NI) and denominator (# of shares) decrease in EPS equation, and really depends on which one has more effect than the other. Is my logic correct?
But then my interviewer asked me that if I had to choose one between Accretive and dilutive, what would buying back shares usually be and I just guessed Accretive and totally bs my reasoning. Interested in knowing the right answer.
Lev recap are typically used to increase EPS
I believe Accretive because leveraged recaps force higher operating performance and efficiency to meet debt service payments, in theory. Naturally, a decrease in the number of shares would only add to this if shares are being bought back with debt raised.
https://www.jpmorgan.com/jpmpdf/1320670225793.pdf
where can i get all of those >_ ?
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