What moves enterprise value
Raise debt, issue shares, pay a dividend, buy a machine: which of them changes what the business is worth?
- Say whether an event changes equity value, enterprise value, both or neither
- Explain why financing decisions leave enterprise value alone
- Read which transaction happened from before-and-after figures
- Compare a dividend and a buyback per share
The intuition
Go back to the house. Remortgaging it for more money and putting the cash in the safe does not make it a better house. Neither does taking cash out of the safe to repay part of the mortgage. You have only changed who is owed what.
Spending the cash in the safe on a new kitchen is different. The cash is gone, but the house itself is now worth more. That is a change to the thing being valued.
Enterprise value only moves when the operating assets change. Financing (raising or repaying debt, issuing shares, paying dividends, buying back stock) reshuffles the claims and leaves enterprise value alone.
Why it works
Every question is answered by the change form of the bridge: Δ EV = Δ equity value + Δ debt − Δ cash. Ask two questions of any event: did the operations change, and did cash move to or from shareholders?
- Raise debt, keep the cash. Debt and cash rise together, so net debt and EV do not move. Shareholders were neither paid nor charged, so equity value does not move either.
- Issue shares, keep the cash. Shareholders now own the business plus the new cash, so equity value rises. The cash is subtracted in the bridge, so EV does not move.
- Pay a dividend or buy back shares. Cash goes out to shareholders: equity value and cash both fall by the amount. EV does not move.
- Repay debt from cash. Debt and cash fall together. Neither EV nor equity value moves.
- Buy equipment worth what it cost. Cash has become an operating asset. Shareholders own the same total, so equity value stays put, but cash fell, so EV rises by the amount spent.
| Raise $100 of debt, keep the cash | equity 1,000 · EV 1,200 |
| Issue $100 of shares, keep the cash | equity 1,100 · EV 1,200 |
| Pay a $100 dividend | equity 900 · EV 1,200 |
| Buy back $100 of shares | equity 900 · EV 1,200 |
| Repay $100 of debt from cash | equity 1,000 · EV 1,200 |
| Spend $100 on equipment | equity 1,000 · EV 1,300 |
With 100 shares at $10, a $100 dividend leaves 100 shares worth $9.00 each; a $100 buyback retires 10 shares and leaves 90 worth $10.00 each.
The formulas
The bridge, without the other claims.
Any change to enterprise value is the sum of the changes in the bridge.
Financing moves claims, not operations.
The operations now include the new asset.
One lowers the price, the other the share count.
Worked example
One transaction. Work out equity value, debt and cash afterwards, then rebuild enterprise value.
See it move
Same company. Pick a transaction and its size, and watch which bars move.
- Click through raise debt, issue shares, pay a dividend, buy back shares and repay debt. The two enterprise value bars never move.
- Choose buy equipment. Cash falls, so the "less the change in cash" bar rises, and enterprise value ends higher by exactly the amount spent while equity value stays put.
- Choose issue shares. Equity value rises by the amount raised, but enterprise value does not.
- Make the transaction bigger. Every change grows with it, but the financing events still leave enterprise value exactly where it was.
Run it backwards
Same company, reversed: you only see the figures before and after. Which transaction happened?
Work out the change in equity value, debt and cash, then read the pattern. Debt and cash up together: new debt. Equity value and cash up together: new shares. Equity value and cash down together: cash returned to shareholders. Debt and cash down together: a repayment. Only cash down, with equity value flat: the cash became an operating asset, and that is the one case where enterprise value moves.
A dividend and a buyback of the same size leave identical totals, so the totals alone cannot tell them apart. You would need the share count.
Traps
Say it in the interview
“A company raises $100 of debt and uses it to buy back shares. What happens to equity value and enterprise value?”
Check yourself
4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- Δ EV = Δ equity value + Δ debt − Δ cash.
- Financing moves equity value and leaves EV alone.
- Only a change to the operating assets moves EV.
- Dividend: lower price. Buyback: fewer shares, same price.