Finished a superday a couple weeks ago and ultimately didn't get the offer but I was confused by one of the questions so just hoping someone here with more experience can answer for me so I can get some closure about it. I was asked to calculate the enterprise value of a firm after being given the # of shares, share price, debt, cash, minority interest which I was able to do. The EV ended up being 1500 if i remember correctly. Once I got to this point I was then told that this company acquired another company for 75% debt and 25% cash for a purchase price of 500. I was asked to first go through the changes to the BS and calculate the EV and equity value of the combined firm.

My thought process as I began to get confused: I figured that the equity value would remain the same because no shares were issued and then calculated the EV by adding back the 375 of new debt to the EV of the acquirer and adding back the decreased cash on the BS back to the EV. All in all I calculated the total equity value to be the same (1500) and the EV to be 1750 (1500+375debt-125cash). I am am pretty sure by the way the interviewer responded that I got the question wrong so I'd love additional input on this to see where I was going wrong in my thought process.

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I've come across conflicting information on the guides that I've looked at. For example, one question discussing the balance sheet after an acquisition: "If you've paid exactly what the Shareholder's Equity is worth -e.g., you paid $1000 in cash and the seller has $1000 in equity, then there are no problems. The combined cash balance decreases by $1000 and so will the combined equity. I understand that you need to create goodwill to balance out the purchase price you've paid but am becoming very confused about how the combined equity value would decrease in this example if there was no equity financing taking place. I obviously am missing something here so if someone could clarify this overall concept I'd be pretty appreciative. Thanks:)

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