Enterprise value

New / Eng cubano1
Jul 3 3 Comments

Got a question about EV. If EV is treated theoretically as the purchase price of the company, then if the company had more debt then the EV would increase, so the company is more expensive to buy?
EV = market cap plus net debt

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TOP 3 Comments
  • LinkedIn / Other lifestrat
    A couple things:

    1) if you raise debt, you have cash and net debt is the same, so EV is the same

    2) if you two companies that are exactly the same with one having more debt than other, share price implicitlly values the company with more debt as riskier
    Jul 3 2
    • New / Eng cubano1
      OP
      Apologies but I’m still a little confused. If a company A and company B have the same market cap, but company B has more debt, then company B is more expensive to purchase than company A, even though company B is riskier because of more debt? Is there something wrong in my approach?
      Jul 4
    • Bloomberg / Other ASSSlayer
      Your approach is not wrong but it's point 2 here that is important.
      If you take two companies with the same mcap but one has debt, technically that fact will already be reflected in the mcap that is lower than what it would be otherwise
      Jul 4