3.2·5 min read
Why Deleveraging Builds Equity
Even if enterprise value never moves, paying down debt transfers value from lenders to equity holders.
By the end you can
- ✓Show how debt paydown raises equity value
- ✓Separate operating gains from financial gains
Equity value is enterprise value minus . Hold EV flat and pay down debt, and equity value rises dollar for dollar with the debt repaid.
Worked example · Flat EV, rising equity
Given
- •Entry: EV $900, debt $500, equity $400.
- •Exit: EV still $900, debt now $250.
Solution
- 1.Exit equity
Answer
Equity grew from $400 to $650 - a 1.6x return - with no change in enterprise value, purely from .
Check yourself
EV is unchanged at $1,000, but debt falls from $600 to $350 over the hold. Equity value goes from: