Impact Of Issuing Debt On Shareholders Essay Example | Topics and Well Written Essays - 4500 words

Impact Of Issuing Debt On Shareholders - Essay Example The internal rate of return of the expansion project is expected to far outperform the company’s hurdle rate. The acquisition of Productos Reunidos is also a positive net present value project. However, empirical evidence suggests that market value of the acquiring firm experiences little if any gain after acquisition, and in some cases even losses. Also, the reasons cited by the management and the merger and acquisition committee for acquisition, namely, diversification and PE magic, are wrong. Hence, I recommend Tyneside Electronics to grow internally by investing in the expansion project. Moreover, there are gains from financing the expansion project by leverage, even in the worst case scenario of 10% increase in revenue, as illustrated in section A and B. Also, if the expected return on shares stays constant, I recommend the firm to adopt a D/E ratio of 1, the optimum capital structure.