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If the cash is sitting on balance sheet, yes.
Think about it this way: if a company issues $100 notes, would you expect the value of its enterprise value to change?
well, technically yes. but how do you know if it's sitting on the balance sheet? if it does, you add debt to EV and take out cash, so the EV wouldn't change if that's the case.
It depends. You'll have to read what they are using the proceeds of the notes for. If they are using the notes to pay down other debt, then nothing changes (debt stays constant since old notes are getting swapped for new notes), if they are using it for corporate purposes add $100mm to the cash balance. If they are using it to finance an acquisition, you'll have the make pro forma adjustments for that deal.
Finally, more of a nuance: if the company is issuing $100mm of debt, they'll usually only get maybe $95mm of cash if they are paying $5mm out the door in fees, so you might have to take that into account as well
No, you wouldn't expect enterprise value to change... Company is just issuing debt, raising cash - this doesn't change the business at all. (Ok, there is tax shield to consider... but ignore for now).
This is reflected in the equation for enterprise value: EV = Eq Val + Debt - Cash
Debt increases and cash increases, they offset each other and there is no change in EV.
On the other hand, if the proceeds are spent on, say, capex, this should improve the operations, so EV should increase. This is also reflected in the above equation: debt increases, cash does not, so EV increases.
Add to both... its cash flow from financing.
Yes your EV does not change however your P/E changes in the future, you're losing money by paying for the debt on your interest line.
In addition, this changes how much leverage you have on the Company DEBT/EBITDA etc.
Realization I'm definitely that D-bag VP in the office after my "easy interview questions" post.
Also the extremely detailed analysis when spreading comps is not necessary, just flag it for your Associate and say issued debt for XYZ reason. Then just have reasons for the debt being raised.
Wouldn't be spinning wheels... if they bought a company unless estimates changed you're not getting credit for the revenues unless consensus estimates change so it is rather moot.
What do you mean by the above? Can you explain?
Is this just a Modigliana-Miller theorem in regards to EV not changing? I understand the P/E part.
If investors believe that the new debt issuance has overleveraged the company, the equity value/market cap can subsequently drop due to the added bankruptcy risk.
Let me know if that's not clear enough. It's late.
Are you saying market cap or equity value would decrease due to.share price falling because of risk?
read the filings, it tells you exactly why they are issuing the notes
If you buy a company with debt today and you do not have estimates change on the comp sheet you are punishing the company by levering up their balance sheet (adding debt subtracting cash for acquisition) without including additional revenue and net income to the forward looking statements.
These are logical things most people don't think about. If you have $3.0B or $2.9B in cash it is probably meaningless as well.
This is also why you guys should be wary on this forum when people get into "technical details" on "exact accounting and financials" they likely do not work on the Street.
Sorry, I still don't understand what you are talking about. I get it somewhat, but it is still a little unclear. It's okay, it's probably a little too high level for me anyways. Thanks.
If you add debt to a balance sheet for a company because they bought a company the company now has more "leverage"
That means it has higher debt/ebitda metrics.
If research analysts don't change estimates because of the acquisition you are punishing the company with debt but you are not getting higher revenue or eps numbers in the future forward looking income statements
OK, got it -- thanks.
Are you saying market cap or equity value would decrease due to.share price falling because of risk?
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