NEAS,
According to the textbook "Companies repurchase shares... when they wish to increase their debt levels."
Can you explain the logic of this action?
Thanks.
[NEAS: Suppose a firm starts out with all equity financing, of 1 million shares at $10 a share. When the firm begins, it has a good business plan but no years of stable earnings, so a venture capital firm helps it get started, but it can’t borrow at affordable rates yet.
After five years, the firm has retained earnings of $20 million and can now borrow at 8% per annum. Its stock is worth $30 a share. It wants a 50%-50% split of debt and equity, so it borrows $15 million and repurchases $15 million of shares.]