What happens to PE ratio when there is a div recap?
Title says it all.
What happens to PE ratio when there is a div recap?
Believe it will go up because Re > Rd (1-t), but grateful if you can walk me through your thought process
Kinda theoretical since price can move either direction. If it becomes too levered, equity investors may sell because they are uncomfortable with debt burden going forward. If it’s the right amount, maybe people buy b/c management is allocating capital efficiently by putting on sufficient debt on the business. How expensive or cheap is the debt? What industry is it in and can it support x leverage ratio? All depends.
Earnings should go down if you’re looking on a forward basis. Interest expense goes up decreasing earnings. Interest income shouldn’t change if cash is immediately dividend out to shareholders. Fees are amortized so that’s probably an additional minor drag. If cash from dividend recap is used to invest in business that generates future earnings, that’s additional complexity. If cash is used to buyback shares, that also could impact the denominator.
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