A CFO is proposing that his company issues equity to reduce leverage because the company's current...

Question

A CFO is proposing that his company issues equity to reduce leverage because the company's current leverage ratio is 40% and the CFO believes that lower leverage will increase company value. However, a board member, who is a CFO of a different company, said that despite having a high leverage ratio, the company is mature and highly profitable, and has an investment-grade credit rating (rating of A-). The board member is arguing that the company doesn’t need to issue equity to reduce debt.

Question: Who is right (the CFO or the board member)?
Explain your answer.

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Rochak · Accepted Answer

Both the CFO and the board member could be right, depending on the specific circumstances of the company and its industry.
Lowering leverage by issuing equity can increase a company's value in several ways. For instance, it can reduce the company's cost of capital by improving its creditworthiness and reducing its interest expenses. Additionally, issuing equity can also improve the company's liquidity and financial flexibility,

A CFO is proposing that his company issues equity to reduce leverage because the company's current leverage ratio is 40% and the CFO believes that lower leverage will increase company value. However,...

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