Question
Due to a new order from a very large customer, the Chairman of the Board, CEO and President of the company all think that the
Due to a new order from a very large customer, the Chairman of the Board, CEO and President of the company all think that the value of the company's equity will rise substantially. They are in favor of using the company's ability to borrow funds to repurchase outstanding shares of common stock. Their target is to repurchase 25% of the company's outstanding common equity. If the common is trading at $ 20 and they all believe
that the common will rise to $ 40 per share over the next two years, given the company's fundamentals and the general positive condition of the US equity market, how do you feel about this strategy given the following:
A) You believe that when the company's debt/equity ratio rises to 3, the company's ability to borrow may become impaired. Before this transaction, it is at 1 to 1.
B) You have some concerns that the company's WACC could rise to a level that would concern the company's lending bank.
What would you suggest doing ?
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