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?
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.
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