Hi,
I was studying some technical questions and was stuck on the following question. Could anyone help explain this to me?
"Compay has EV which is lower than the below book value of debt. What does this mean and what advice will you give to the Company?"
Variation of this question is
"Company has senior debt of 200mm, high yield debt of 200mm, EBIDTA of 50mm and trades at 6x EBITDA, what is equity value? Does this make sense? What advice/options are avaible to the client?"
Thank you.
This basically means you have negative equity value.
You raise 400mm debt (200mm senior & 200mm junk), as well as 200mm equity. You purchase 600mm of PPE. A hurricane hits and destroys half of your warehouses and equipment. You write in an impairment charge on your assets of 300mm. Now you have negative equity value -100mm, debt of 400mm, and EV of 300mm.
This is just one example, but google examples of negative equity value for more realistic ones.
Also check here for examples:
https://corporatefinanceinstitute.com/resources/knowledge/finance/negat…
Thanks appreciate it! I'll take a look at negative equity value articles.
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