Technicals
Need help to clear this concept. Let’s say we raise $100mm in 1) Debt 2) Equity. How will these transactions affect EV in each case?
a) Assume no taxes and no underwriting fees
b) Assume no taxes and 5% underwriting fees
b) Assume 40% tax rate and 5% underwriting fees
Proposed solutions:
a) No impact on EV in both 1) and 2)
b) EV goes up by $5mm in both 1) and 2)
3) EV goes up by $3mm in both 1) and 2)
None of these change enterprise value by a penny
Enterprise value reflects the companies operating assets
That is only true in the absence of taxes and transaction costs (perfect capital markets). In the presence of taxes and deal fees, capital raising does affect EV but impact is minimal and can be ignored for all practical purposes.
Sure there is a marginal impact to excess cash. This is the wrong thing to focus on.
99% of enterprise value questions are to see if you get it conceptually. So you get questions about raising debt/equity, m&a consideration, dividends, capex, etc. The impact of fees is besides the point
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