Tricky Rx Technical (please help)
You are using 10M in cash to buy back debt trading at 50/$, tell us what would happen
to enterprise and equity value
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wouldnt nothing happen?
W
If you buy back debt at 50 for $10M, then your cash would be down 10M, your book debt would be down 20M, therefore your net debt is -10M and your enterprise value is -10M. EQ value is unaffected.
If you buy the debt back at face value even tho it's trading at 50, your EV is unaffected. Often times you have clauses in the debt covenants that prevent a company buying back its debt below a certain level (often par + a few percent).
So if you’re answering this question should you ask a follow up to clarify at what price your buying back the debt?
Buying back debt will not effect EV no matter what because it doesn’t have an impact on operating assets/liabilities. So the answer is that the difference between the discount price and the face value accrues to equity. Answer to any of these style questions: EV is unaffected, equity increases by face value minus purchase price
Wouldn’t even say it’s theoretically correct. EV = market value of equity + market value of debt - cash. So assuming the debt’s market value is 50c of face value there is no reason EV would be affected. Even if you were to say they’re buying debt back at a non-market value, equity value should adjust such that EV remains unchanged.
this is correct
forgive me, I'm just an industry coverage pleb... but isn't the debt trading at a discount because the implication is that the EV is impaired? Assuming trading at a discount due to idiosyncratic reasons and not prevailing interest rates. I also think you need to record a gain of retiring the debt at below the book / carrying value. That would reduce your cash and thus equity value slightly.
EDIT: Ok I see, the EV calc is already using market value of debt.
It would be selective default and your company will explode
Bump
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