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What remains to be seen , however , is whether shareholders are better or worse off with more leverage . Problem 2 does not tell
Whatremainstobeseenhoweveriswhethershareholdersarebetterorworseoffwithmoreleverage
Problemdoesnottellusbecausetherewecomputedtotalvalueofequityandshareholderscare
aboutvalueper share.Ordinarilytotalvaluewillbeagoodproxyforwhatishappeningtotheprice
persharebutinthecaseofareleveringfirmthatmaynotbetrueImplicitlyweassumedthatasour
firminproblemsleveredupitwasrepurchasingstockontheopenmarketyouwillnotethat
EBITdidnotchangesomanagementwasclearlynotinvestingtheproceedsfromtheloansintocashgeneratingassetsWeheldEBITconstantsothatwecouldseeclearlytheeffectoffinancialchanges
withoutgettingthemmixedupintheeffectsofinvestmentsThepointisthatasthefirmborrows
andrepurchasessharesthetotalvalueofequitymaydeclinebutthepricepersharemayrise
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