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Sir, can you please provide me a solution to this question. I am really confused by this question !
How can you use debt finance to repurchase ordinary shares ??? What effect does it have on WACC ???
Also I am not sure whether we need to do the actual arithmetic in this question like calculating the cost of equity and cost of debt seperately ????
Also how do you answer this question:
What issues might influence a company’s capital structure strategy ?I do not have the Becker Revision Bank (only the BPP Revision Kit) and so I cannot provide you with a solution, but surely there is an answer in the Revision Bank?
To buy back shares and cancel them, the company needs cash. If they do not have the cash available then they will borrow money by raising more debt finance.
If the equity and debt change then both the weightings and the cost of equity (and possibly the cost of debt) will change – this is fundamental to the understanding of the WACC.
Whether you need to do the calculations depends on what the question asks for and whether it requires you to calculate the WACC.
Issues influencing the capital structure strategy are covered in my free lectures (and must be covered also in whichever book you have been studying from). The most obvious one relates to Modigliani and Millers’ theory of gearing.
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