Impact on EV and Equity Value
Guys, I have few questions regarding effect of some events on EV and Equity Value. Just want to clarify am I right.
Got these questions on one of the interviews at PE.
Company is a shell, has no equity, assets, etc.: EV = Equity + Debt - Cash = 0 + 0 - 0 = 0 Equity Value = 0; EV = 0
Company obtained debt of $100 EV = Equity + Debt - Cash = 0 + 100 - 100 = 0 Equity Value = 0; EV = 0
Bought a plant for $100: EV = Equity + Debt - Cash = 0 + 100 - 0 = 100 Equity Value = 0; EV = 100
The plant burned down: EV = Equity + Debt - Cash = -100 + 100 - 0 Equity Value = -100; EV = 0
In last one, does Equity decreases due to assets write-off that goes with negative sign to retained earnings (-100)? Or maybe there is another explanation?
Incoming IB FT, so not too sure but I agree with all your calcs
One way id think about the last part is via the BS
If equity is equal to Assets - Liabilities then you have 0 assets since the plant burned down but have 100 in debt. In order for them to balance shareholder’s equity would have to be -100
OR like you said, retained earnings (under SE equity) would be -100 given the write down of 100
Correct - you now have a shell company with 100 in debt and nothing else. This might show up as "Retained Earnings / (Accumulated Deficit)" or "Retained (Deficit) Earnings" or something to that effect
For book value of equity, sure, but for market value of equity, you can never pay someone for them to take shares of a company without anything in exchange, so there will always be a residual value of equity included in any company. I've seen it before where you take a black scholes pricing model to the company's equity and layer in various assumptions
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