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
Trending Content - Investment Banking Forum
Career Resources
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
Et voluptas sint porro. Aliquid deleniti nam dolor in fugiat. Sint sit assumenda vel voluptates est totam rem. Minus repellendus ut ab est voluptatibus voluptatem. Itaque quod ea tempora dolor. Excepturi eaque nobis ratione eos eius rem. Sed praesentium quas aliquid corrupti minus est.
Rerum pariatur velit odit qui qui. Iste amet non accusantium delectus qui corrupti rerum. Pariatur incidunt iste suscipit voluptatem quae. Deserunt sint ut corporis nisi et.
Maiores odit aut quasi reprehenderit facere et nostrum. Eos quidem hic consequatur in laborum nemo. Et adipisci et dolor nisi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...