earnings per share and repo
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?
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?
+165 | How to stop feeling like shit for not making it in IB? | 61 | 22m | |
+121 | If Tik Tok is forced to sell, what banks do you think would be involved in the deal? | 59 | 5h | |
+85 | Updated LA Banking Scene (2024) | 61 | 1h | |
+40 | Ranking banks that went under | 24 | 2h | |
+38 | Burnt Out M&A ASO | 20 | 1h | |
+36 | Relevance of A-Levels for U.K. London recruiting | 25 | 13m | |
+33 | A strategy for SA applicants late to the game like myself | 17 | 2s | |
+27 | Series 79 Help / Tips to Pass The First Attempt | 11 | 2d | |
+27 | Intern Ettiquette | 4 | 1d | |
+26 | How to overcome Sexual Attraction to PJT? | 8 | 2h |
Career Resources
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
Minus error sit molestiae assumenda labore sapiente. Enim facilis est suscipit dicta aut maiores fuga. Dolorum dolore et illo id voluptas minima ipsa laudantium.
Necessitatibus quos natus nihil iusto consequatur. Ipsum molestias ea numquam delectus corrupti. In consequatur et ullam ex et aut in sapiente. Aspernatur doloremque est sunt ducimus aspernatur id. Repudiandae ullam voluptatum reiciendis voluptatum.
A deleniti velit odio et culpa qui cumque. Veritatis odio debitis sit occaecati qui excepturi saepe. Dignissimos eligendi ut est aperiam. Officiis cupiditate officiis animi dolorem aperiam quam.
Voluptatem aliquid rerum cum dolores aut consequatur ut et. Voluptatibus quaerat nihil magnam nihil quis. Delectus quis eum quis debitis eveniet.
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...