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Up0
What happens to the financial leverage if the firm repurchases stock using external debt?
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Up3
First you have Assets up (cash) Liabilities up (debt). You than use your cash to repurchase shares, so the Assets decrease. As Liabilities stay the same, Equity must also decrease. Thus, when you repurchase stock using external debt Liabilities go up and Equity goes down, increasing financial leverage.
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Up0
That was neatly explained. Thanks a lot.
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