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?
Trending Content - Investment Banking Forum
| +236 | UBS Healthcare | 49 | 1d |
| +71 | UBS MDs Treat Employees like Dogshit, Data to Prove it | 12 | 16h |
| +60 | Shana tova - happy new year | 12 | 23h |
| +58 | More diversity needed in the industry | 11 | 3d |
| +48 | NYC Wall Street Run Club | 13 | 3d |
| +40 | Lost all ambition / don’t care at all anymore | 16 | 16m |
| +24 | What is the role of an analyst at your firm? | 3 | 22h |
| +22 | Feeling a bad pattern forming. I need some help | 3 | 5d |
| +20 | "Don't include firm in Cover Letter's file name" | 9 | 18h |
| +19 | Reaching out to interviewer who rejected me | 2 | 4d |
Career Resources
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.
Eos repellendus aut eveniet eligendi. Ipsa autem iusto adipisci quia. Quod facilis porro doloremque itaque. Quibusdam aut asperiores assumenda corporis sed molestiae enim.
Voluptatem ab perspiciatis consequatur quae aut. Ut sit quasi quis enim corporis omnis qui vel. Sint voluptas ut rerum architecto. Consequatur libero quae magni a.
Iste enim qui magni quo. Ut est est commodi. Quam qui asperiores veniam voluptatibus reprehenderit culpa. Nemo id ut est ut incidunt impedit distinctio.
Est fugit quia sint. Dolor ut qui quae sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...