Does debt issuance affect EqV?
Does EqV change when you take on debt?
My assumption is no, since taking on debt has no effect on shareholders' equity. Is this correct?
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Depends.
In a tax-free perfect market setting, capital structure does not affect the value of the firm, only future CFs does. This is because an increase in debt, lowers the wacc, but the decrease is exactly offset by the added risk of equity, resulting in higher cost of equity (and wacc).
However, in a world with tax, it can add value to the firm in the form of tax shields (which benefits equity-holders). However, only up to a point, where the distress costs from further increases in debt outweights the benefits of tax shields.
Google Modigliani and Miller theorem.
I think it's as simple as Liabilities go up 100 from Debt, and Assets go up 100 from Cash. Both sides balance so mathematically the equity can't change value. Then when you calculate EV the firm's operating assets are unchanged (cash is non-operating) so EV is unchanged. In other words net debt does not change along with no change in equity, so no change in EV. This is the memorizer interview answer.
I can appreciate the M&M though, good points there.
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