Why does increasing debt not increase enterprise value?
"Increasing debt does not increase enterprise value" but it is literally in the formula for Enterprise Value. Can someone explain why it doesn't increase enterprise value?
Trending Content
| +299 | How to deal with elitism | 96 | 4h | |
| +126 | Legal implications of “stealing” a model | 74 | 11h | |
| +105 | 8 figure comp in IB/PE compared to Tech? | 47 | 3s | |
| +91 | Gtown RBC CVP update | 35 | 17s | |
| +79 | When after you started have you been hit with reality? | 22 | 4h | |
| +69 | Am I Cooked for SA 2029? | 18 | 45m | |
| +59 | IB/Finance in Denmark? | 34 | 11h | |
| +58 | Has anybody quit for mental health reasons and been able to rejoin PE or high finance more broadly? | 10 | 1d | |
| +44 | HELP. Signed but better opportunity | 41 | 1d | |
| +41 | Forgot to check email after getting back home at 7 and i missed my associate's emails | 21 | 21m |
Career Resources
Cash
elaborate? lol
If companies raise money thru debt they could get it in cash. The cash cancels with the debt, to initially make the enterprise value the same (it will change over time as they use cash)
Your cash balance goes up which offsets the increase in debt. TEV = EV + Debt - Cash
To offer an alternative explanation, think of EV as the value of the cash flows / operations of the company independent of capital structure.
Any net debt just eats into equity value, rather than increasing the actual value of the operations. That’s why equity value is usually the output of a EV to Equity Value bridge for private companies and fundamental valuation of public companies.
Only if the cash is invested to generate more cash flow does debt increase EV.
Alias ipsam qui officia dolorum non consequatur maiores. A quasi doloribus fugiat molestiae et et.
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...