Series 79 practice questionmediumRecapitalization
A company decides to recapitalize by issuing $50 million in new debt and using the proceeds to repurchase stock. What is the most likely effect on the company’s capital structure?
- AIncrease in leverage and a higher debt-to-equity ratio✓ Correct answer
- BDecrease in leverage and a lower debt-to-equity ratio
- CNo change in leverage or debt-to-equity ratio
- DIncrease in total equity value
Explanation
Why A — Increase in leverage and a higher debt-to-equity ratio
Issuing debt to buy back equity increases leverage and the debt-to-equity ratio. Equity value typically declines, not increases, and the ratio certainly changes.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 995+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Collection, Analysis & Evaluation of Data questions
- A company has a capital structure of 70% equity and 30% debt. Its cost of equity is 11%, pre-tax cost of debt is 7%,…
- If the corporate tax rate increases, what is the expected impact on the WACC, assuming the capital structure is…
- A sponsor-backed company is being advised to finance a large acquisition with both debt and equity. Which of the…
- Which of the following is a risk of a capital structure with a large proportion of short-term debt relative to…
- An analyst is performing a DCF valuation and mistakenly uses book value weights instead of market value weights for…
- Under FINRA Rule 5110, which of the following must an investment banker consider when advising a public company on a…
- A company’s pro forma debt/EBITDA ratio increases from 2.0x to 5.0x after a leveraged recapitalization. Which of the…
- In advising a client considering an acquisition funded 100% by debt, which of the following should an investment banker…