Hello John
hope all is well
please tell me what is the logical and simple reason why it would signal the market that shares of the company are overvalued when the company makes a decision of taking on more debt in its capital structure?
i think it is because of 2 reasons. please tell me if i am wrong.
1) more debt will decrease wacc hence increase npv and share holder value
2) shareholders would want the company to take on more debt rather than issue equity because issuing more equity would decrease the share price as there will be more shares in the market which would depress the earnings per share figure
is that right?
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Debt and signalling
8y ago#1Where did you read this statement, because deciding to take on more debt does not necessarily signal that the shares are overvalued. There are lots of reasons why the company might decide to take on more debt. (I am wondering if you saw this statement in a question, in which case it is likely as a result of other information in the question.)
Although both your statements are correct, they would not explain why the shares were currently overvalued, since the share price will increase as a result.
sorry i wrote it wrong. i meant to say that
why it would signal the market that shares of the company are "undervalued" when the company makes a decision of taking on more debt in its capital structure?
its undervalued not overvalued.
8y ago#3:-)
In that case your statements are correct :-)
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