What happens to enterprise value (EV) if a company issues equity and uses the proceeds to repay debt? A. The EV goes up...
What happens to enterprise value (EV) if a company issues equity and uses the proceeds to repay debt?
A. The EV goes up
B. The EV remains the same
C. The EV goes down
D. It depends
Homework Answers
Answer: Option B is correct
The EV remains the same
Explanation:
Enterprise value=Market capitalization + Debt - Cash
Now, if the company issues equity to raise capital the market
capitalization will increase
If the company used the same amount to repay the debt then the
value of debt will decrease
Both the effects will cancel each other and the enterprise value
will remain the same.
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