What stays to be seen however, is whether shareholders are better or worse off with more leverage. Problem 2 doesn’t inform us, because there we computed complete worth of fairness, and shareholders care about value per share. Ordinarily, complete value might be a good proxy for what is going on to the price per share, however within the case of a relevering firm, that is probably not true. Implicitly we assumed that, as our agency in issues 1-3 levered up, it was repurchasing inventory on the open market (you will observe that EBIT didn’t change, so management was clearly not investing the proceeds from the loans in cash-generating assets).
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We held EBIT constant in order that we may see clearly the effect of monetary changes with out getting them blended up within the results of investments. The point is that, because the agency borrows and repurchases shares, the total value of equity may decline, however the worth per share may rise. Now, fixing for the price per share may seem unimaginable, because we are coping with two unknowns—share value and alter within the variety of shares: Share price=Total market value of equity