The Wall Street Journal (October 5, 2009) reported that analysts are worried about companies borrowing money to pay dividends and to repurchase outstanding shares of stock. Aircraft parts manufacturer TransDigm Group borrowed $360 million to pay dividends, while Intel Corporation borrowed $1.5 billion to buy back shares of stock. These concerns of analysts are not new; in March 2007 the Wall Street Journal reported two instances of borrowings-for-dividends (Rexnord Corporation and Scotts Miracle-Gro) that sparked concerns. Companies have defended the actions, often citing historically low borrowing costs.
REQUIRED:
Discuss how the above transactions affect the basic accounting equation for the companies involved. What risks are posed when a company pursues such a strategy? What are the benefits of such a decision?