Hi folks,
I have some questions for you. How will the following transactions impact EV, MV Equity, and Share price in a world without taxes (perfect capital markets) and with taxes (imperfect/real markets):
- A company goes private to public
- A company goes public to private
- A company issues $100 M in new equity
- A company repurchases $ 100 M in equity
- A company borrows $100 M in new debt. Borrowed funds are not invested further.
- A company repays $100 M of debt
I will post my solutions below and would be glad to have your opinion. I have been quizzed on various forms of these questions in past ib interviews.
No taxes:
EV = no change Share price = increases due to better liquidity and transparency. MV Equity = increases slightly more than the rise in SH. Equity
EV = no change Share price = reduces. Due to less liquidity and transparency. MV Equity = no idea about this one.
EV = no change Share price = reduces. Future EPS are potentially diluted. MV Equity = inconclusive. Depends on percentage decrease in share price and rise in share count.
EV = no change Share price = increases. Future EPS will potentially grow. MV Equity = inconclusive. Depends on percentage increase in share price and drop in share count.
EV = no change Share price = decreases. Cost of equity will rise as leverage increases. MV Equity = drops. Share price will drop as cost of equity rises while share count doesn’t change.
EV = no change Share price = increases. Cost of equity will reduce to lower leverage. MV Equity = increases. Share price rises and share count doesn’t change.
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