CFA CFA Level 1 Effects on Financial Leverage after repurchasing stock?

Effects on Financial Leverage after repurchasing stock?

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    • WannabeYuppie
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      What happens to the financial leverage if the firm repurchases stock using external debt?

    • Chevalier
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      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.

    • WannabeYuppie
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      That was neatly explained. Thanks a lot.

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