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To: Haim R. Branisteanu who wrote (49653)	5/7/2000 10:31:00 AM
From: Zeev Hed	Respond to of 99985

Haim, apparently I am not making my point very clearly. there are two issues, the use of debt in a corporation financial structure, and the buying back of stock by corporations, these are two independent issues, and just because one company engages in both activities, these should not be analyzed as related events, IMHO. If as a company, I have access to low cost debt, and by low cost I mean a rate which is lower than my pretax return on assets used in the business, it is my duty to avail myself to such debt (within rational ranges as I have explained before) because I get a higher return on stock holder's equity (using OPM). That is an extremely simple concept of optimization of return on equity. Some zealous analysts used to glorify companies with no debt at all, and I think that some of such companies are losing an opportunity to increase the return on equity (of course, if their stock is selling at huge multiples of book, selling equity at such valuations to "suckers" is preferred to taking on debt, like AMZN's initial convertible debt which has converted at astronomic valuations) If as a company, I decide that I am going to spend 25% of profits on paying dividends to my stockholders (something neither SUNW nor MSFT do), then I have to decide what is the best way of doing this. I can pay out all of that 25% out as cash, and my stockholders will end up with only 15% (assuming tax rate of 40%, which is conservative for dwellers of NY for instance) of my after tax earnings. What corporate America has discovered (and Congress has not yet discovered, luckily) is that they can uses the same 25% of earnings by paying out only 10% as cash and use the other 15% to buy back their own stock, now my stock holders end up not with 15% of my earnings, but with 21% of my earnings (since the 15% I used to buy back stock was not taxed to my stock holders), thus my stockholders actually get 40% more dividend, while the company spends the same amount of money. This of course is a quirk of the double taxation phenomenon we have, whereby a company pays about 35% of its earnings as taxes and then their stock holders pay 40% on the distributed dividends. Quirks in tax laws always bring about tax evasion scheme (and as a result mal distribution of Capital, see the S&L fiasco which resulted from trying to correct too fast another mal distribution of capital created by the then prevailing tax law), and corporate buy backs of stock is nothing but a "tax evasion" loophole. As long as this loophole exists, dividend paying corporation will use it. Some companies (MSFT) use only buy backs as dividend distribution means. Zeev