Is Enterprise Value dependent on Capital Structure or no
Basically the title. Does Enterprise value depend on capital structure or is it independent. (wordcount)
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Independent. You issue 100 of debt, enterprise value does not change.
What if they issue equity and dilute shareholder value, that would affect it right ?
Other comment is wrong - interest tax shield (interest is tax deductible, dividends aren’t) means that enterprise value does depend on capital structure
Google Modigliani-Miller if you want to learn more
Ok. I am not disputing that Enterprise value is indirectly impact by capital structure and that how a company is financed has an impact on the value of the company. I am referring to how the EV does not change after financing activities and issuing debt in isolation will not affect enterprise value.
The objective correct answer when asked a question in an interview like "How does enterprise value change if a company issues $100 of equity or debt" is it does not.
With tax and bankruptcy friction yes. In a frictionless world, no. MM as others have mentioned.
Theoretically, the answer is no. EV measures the value of a business’s operations. Issuing debt and equity shouldn’t change the value of a business’s operations or its EV. Btw, this is what Miller Modigliani tells you.
Practically, the answer is absolutely. EV is calculated using market value and net debt. Market value changes when you issue equity (you can calculate what the stock price and equity value will be after an equity issuance, and it’ll never tie to the actual stock price and equity value) and if you issue too much debt (too much debt means your company is overlevered and the value of operations mostly belongs to debt holders. Equity holders get frustrated and sell, driving down the stock price). Also good point above regarding tax shields.
Even from a purely calculation (theoretical) standpoint wouldn’t the market value of equity change because the leverage of the equity beta (to produce the levered beta) needs to be adjusted as the capital structure changes?
Ok so what I’m understanding is that issuing debt or equity doesn’t change enterprise value at all but it is dependent on capital structure for various reasons including the interest expenses and that there a tax shield
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