2.3·7 min read

What Moves EV vs. Equity Value

Only changes to the core business move enterprise value. Changes to capital structure move equity value but leave EV untouched.

By the end you can

✓Predict whether an event changes EV, equity value, or neither
✓Explain why raising debt held as cash leaves EV unchanged

The rule

Only changes to the core operating business change enterprise value. Pure capital-structure changes (raising debt, issuing stock to sit as cash, paying down debt with cash) reshuffle the bridge but leave the same.

Worked example · Max's Bikes raises debt

Given

•Max's Bikes: $100mm , $50mm debt, $25mm preferred, $10mm cash.
•It raises $75mm of new debt and parks the proceeds in the bank as cash.
•What happens to ?

Solution

1.Debt rises by $75mm
Total debt: $50mm → $125mm (adds to )
2.Cash rises by $75mm
Excess cash: $10mm → $85mm (subtracts from )
3.The two moves cancel
$+75 - 75 = 0$

Answer

is unchanged. The new debt is exactly offset by the new cash. The core business didn't change, so didn't either.

Contrast that with an operating change - winning a major contract, improving margins, growing the store base. Those change the value of the core assets, so they move directly (and flow through to too).

Moves EV (core business)

›Higher revenue or margins
›New products / markets / capacity
›Operational efficiency gains
›Acquisitions of operating assets

Moves only equity/cap structure

›Issuing or repaying debt
›Issuing shares to hold as cash
›Paying a dividend (cash out)
›Share buybacks

Check yourself

A company issues $200mm of stock and holds the proceeds as cash. What happens to enterprise value?

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Enterprise Value & the Bridge

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EV Multiples vs. Equity Multiples