[rsj_hn]

A lot of people think that the reason why a business is bought up is because it isn't profitable, but a business is bought up when it's undervalued. If you can pay off the loan from the profit the business is earning and have something left over then you can buy the business.

This is why a business wants its share price to be high. When the share price falls, then you become vulnerable to this. It's all about opportunity cost. Thus a company will lay off people or close a division even when it is still earning a profit, as long as that profit is less than what justifies a reasonable share price - one that prevents this type of buyout. Therefore the rate of return on debt forms a baseline for the return of equity. The end doesn't have to come from not being able to pay your bills, but from being repurposed for another use. Please remember this the next time someone says "Company X didn't need to do this, it was still profitable!" or "Companies don't need to keep shareholders happy!" Please also keep this in mind when someone is insisting that low interest rates are a good thing. Low rates bid up shareprices and create a lot of churn in the business world.