IBD Interview Question: Leverage Recapitalization accretive or dilutive?

VanPro
Rank: Senior Baboon | banana points 202

Is Leverage Recapitalization (two ways: taking on debt and buying back shares or taking on debt and giving out as dividend) Accretive or dilutive?

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Comments (7)

Oct 27, 2016

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.

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Oct 27, 2016

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.

Oct 28, 2016

Lev recap are typically used to increase EPS

Jan 25, 2017

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.

Jan 25, 2017
    • 1
Jan 25, 2017

where can i get all of those >_< ?

Jan 25, 2017

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