I initially thought that unless the capital that has been raised is utilized to invest in a positive NPV project, enterprise value does not increase.
However, when debt is raised, it increases the cash, increases the debt amount, and ALSO increases the equity value (b/c increase in cash usually increases the equity value), eventually increasing the enterprise value by the increase in equity value. OR does the announcement of debt issuance decrease the stock price?
Also, when debt is issued, where do we account the benefits of tax-deductible interest expense?
Please let me know if I am missing something.
Thanks guys!
Why would the increase in cash increase the equity value (I assume you mean market cap goes up here) if the cash was debt financed? You have a liability exactly equal to the cash amount that the debtholders have a priority claim on.
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