Guys,
Can someone explain to me what's wrong with this reasoning? I can't find an ironclad argument against it and that bothers me...
January: Value a company X, knowing it's Business plan and net debt. You get an EV and Eq. V.
February 1st: Raise debt, get cash to fund business plan. EV and Eq. V don't change.
February 2nd: Spend cash on CapEx according to the business plan. EV stays the same (future cash flows don't change), hence Eq. Value should decrease to make up for the increase in net debt.
Investments are NPV-positive.
Basically, as we go along the scheduled business, equity value would be decreasing. I could be wrong but I don't think the Eq. V. should not suffer from simply following the business plan although the new assets haven't generated earnings yet. Where am I wrong?
I'd say that it's not comparing apples to apples because one cannot take a business plan and balance sheet at different dates, but then if I do another valuation on February 2nd, the business plan won't have changed. Simply made up for by the discount factor?
Feeling dumb about it but would rather be here than in front of my boss. Thanks
(edited to say that it's too early for the assets to generate earnings)
How would equity value decrease as a business goes along? If the company is investing in positive NPV projects then the company would generate retained earnings therefore increasing equity.
Yeah, that's my point (sorry I made a mistake when I said "should suffer" instead of "should NOT suffer"). How is it reflected in Equity Value when the asset hasn't had time to generate earnings?
Nevermind I figured it out.
On February 2nd, when you've just spent the new cash on CapEx, your EV doesn't stay the same but actually increases by that much, which cancels out the increase on debt on the other side. Thus Equity Value doesn't change.
EV increases because future capex are reduced by the amount of the investment, which in turns augments FCF_0
yea consider capex as a purchase of pp&e, then your operating assets (EV) will increase.
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