Ed Breen
Registered: Jan 2010
Posts: 484 |
10-29-12 09:15 PM
It depends on what you do (did) with the capital what you are paying the debt service on. If you borrow capital and invest it in assets that produce more future income than the cost of capital then you are increasing real value. If you don't, then you are decreasing real value.
Another way to look at the issue is in terms of future earnings volatility. If you have a high confidence of stable future earnings from existing assets, you can decide to leverage those assets and distribute the capital borrowed to shareholders through share buy backs. When you do this, you can as morganist advises, deduct the cost of the leverage, distribute the value of the borrowed capital to the shareholders through increased share price (due to buy backs) and still reduce the corporate tax burden (as future income has been diverted into present share value). On the other hand, if you future earnings are not as safe as you thought you can destroy shareholder value in a recession.
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