financial leaverage

[samileo31]

explain me plzzzz

[Russ 3 ll GT]

explain me plzzzz

I am not a professor, but I do have a fresh B.B.A. in Finance. A company that issues debt (i.e. bonds) and uses the proceeds to buy back stock is altering its capital structure as the problem states. A company's capital structure (how it is financed) is a ratio of debt (bonds) to equity (stock). Debt financing is considered less risky and is "cheaper" to companies, because the "cost of debt" is cheaper than the "cost of equity". Equity is more "expensive" because shareholders wish to be compensated for their higher level of risk. By increasing the amount of debt used to finance the company and decreasing the amount of equity financing, a company is said to be increasing its financial leverage.