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Hold market cap constant. Borrow $1 trillion. Burn the cash. Is the company now more or less valuable? By your formula, how has the enterprise value changed
by kbutler 7y ago
Hold market cap constant.
Borrow $1 trillion. Burn the cash.
Is the company now more or less valuable?
By your formula, how has the enterprise value changed?
- addicted 7y agoAbsolutely. Enterprise Value is a metric used for acquisitions to determine the real cost of acquiring a company (that’s why cash lowers enterprise value, since it helps pay off some of the cost of acquiring the company, and liabilities increase the enterprise value because those are additional amounts of money you will Have to pump into the company).
- bryanlarsen 7y ago> Is the company now more or less valuable? More. Normally burning a trillion dollars would have taken about a trillion off the market cap, so if it held steady that means a trillion dollar gain somewhere else.
- kbutler 7y ago"There's a pony here somewhere!"
- bryanlarsen 7y agoYup, there's a pony buried in your assumptions.
- hnews_account_1 7y agoLess valuable. What you're missing is that the reason debt is counted is because it is used to buy up assets. In this case, if the cash is entirely burned, it means the value of equity dropped to zero because debt typically has collateral. So the trillion dollars you borrowed would need to be paid back by selling the rest of the company's assets. So in reality, if let's say this trillion dollar debt was super senior and first claimant to assets. It'd drop to the previous market value of the company and the rest of the company's capital structure drops to zero.
- MrPowers 7y agoThis isn't "my formula" - it's the textbook finance formula: https://en.wikipedia.org/wiki/Enterprise_value https://en.wikipedia.org/wiki/Enterprise_value