You buy $100 PP&E with cash. How is EV affected?
I know the answer is that EV increases by $100 because of an increase in net operating assets but where is that $100 in PP&E being added in the EV formula? (EV = Eqv + Debt - Cash)
My original thought process for this is that any reduction in cash would increase EV because it would be a double negative (thus positive). But this explanation is wrong because a reduction in cash would just lower EqV by the same amount and EV would stay the same.
???
By just rearranging the formula:
Eqv = EV - Debt + Cash
A decrease in cash would decrease Eqv
Adding onto this, since:
EV = Eqv + Debt - Cash
Eqv = EV - Debt + Cash
By using substitution,
EV = (EV - Debt + Cash) + Debt - Cash
Therefore any increase/decrease in debt and cash would just be cancelled out. This is how you would think about it formulaically. Don't recommend this way because it doesn't capture the underlying concepts.
You’re over complicating one of the formulas. Let me simplify:
EV = EV
Exactly, EV = EV, meaning regardless of debt and cash changes, EV always stays the same.
But how does that apply to the question above? Like why would debt be impacted by PPE purchase using cash?
It applies to the “???” cuz you seemed confused by the prompt.
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