How Events Impact Equity Value and Enterprise Value

How do Equity Value and Enterprise Value change if a company issues Common Shares and uses the proceeds to issue dividends?
Click the card to flip 👆
1 / 14
Terms in this set (14)
How do Equity Value and Enterprise Value change if a company issues Common Shares and uses the proceeds to issue dividends?
1. Does CSE change? Yes, it increases by the issuance amount. Therefore, Equity Value increases by that amount.
2. Does NOA change? No, because the proceeds are in Cash, which is Non-Operating, and no Operating Liabilities Change. Therefore, Enterprise Value does not change.
How do Equity Value and Enterprise Value change if a company issues Common Shares but does nothing with the proceeds?
1. Does CSE change? Yes, it increases by the issuance amount. Therefore, Equity Value increases by that amount.
2. Does NOA change? No, because the proceeds are in Cash, which is Non-Operating, and no Operating Liabilities change. Therefore, Enterprise Value does not change.
How do Equity Value and Enterprise Value change if a company issues Common Shares to fund an acquisition?
1. Does CSE change? Yes, it increase by the issuance amount, so Equity Value increases by that amount.
2. Does NOA change? Yes, because the assets acquired are operational (the split between Existing Asset and Goodwill/Intangibles is irrelevant), and no Operating Liabilities change. NOA increases by purchase price, so Enterprise Value increases by that amount.
How do Equity Value and Enterprise Value change if a company issues Debt but does nothing with proceeds?
1. Does CSE change? No. Debt issuances do not affect CSE, so Equity Value does not change.
2. Does NOA change? No, because the proceeds are in Cash, and Cash is Non-Operating. Debt is also a Non-Operating Liability. Therefore, Enterprise Value does not change.
How do Equity Value and Enterprise Value change if a company issues Debt and uses the proceeds to issue dividends?
1. Does CSE change? Yes, it decreases by the dividend issued, so Equity Value decreases by that amount.
2. Does NOA change? No, because nothing that changes (Debt, Cash and CSE) is an Operating Asset or Liability. Therefore, Enterprise Value remains unchanged.
How do Equity Value and Enterprise Value change if a company issues Debt to purchase Financial Investments?
1. Does CSE change? No, because Debt issuance do not affect CSE. Therefore, Equity Value remains the same.
2. Does NOA change? No, because nothing that changes here (Debt, Cash and Financial Investments) is an Operating Asset or Liability. Therefore, the Enterprise Value remains the same.
How do Equity Value and Enterprise Value change if a company increases CapEx, boosting Net PP&E?
1. Does CSE change? Cash is used to purchase the PP&E, so CSE does not change. Therefore, Equity Value does not change.
2. Does NOA change? Yes, Net PP&E is an Operating Asset, and it increases; no Operating Liabilities change, so NOA increases by that boost in PP&E, increasing Enterprise Value by that same amount.
How do Equity Value and Enterprise Value change from purchase of Inventory through to sale?
1. Does CSE change? Initially, No. But when that Inventory is sold as a final product (assuming positive Gross Margin), CSE increase by Net Income, which is Gross Profit multiplied by the Tax Rate, so Equity Value increases by that amount.
2. Does NOA change? Yes. When Inventory is purchased, Cash moves into an Operating Asset (Inventory), so the Enterprise Value increases. No further changes to Enterprise Value when Inventory is sold as final product.
How do Equity Value and Enterprise Value change if a company records an increase in Deferred Revenue?
1. Does CSE change? No changes on the IS as DR has not yet been recognised as Revenue, so Net Income does not change. Nothing else affects CSE, either, so Equity Value remains the same. However, when recognised, Revenue will increase Net Income (assuming positive Gross Margin), therefore, increasing CSE, and in turn Equity Value.
2. Does NOA change? Yes, DR is an Operating Liability, but Cash is not an Operating Asset, so Net Operating Asset falls. Therefore, Enterprise Value decreases by the amount of DR. This reduction in Enterprise Value is reversed when the Revenue is eventually on the IS.
How do Equity Value and Enterprise Value change if a company's CEO finds Cash on the street?
1. Does CSE change? Yes, CSE increases due to an increase in Net Income, so Equity Value increases by the Cash amount multiplied by the Tax Rate.
2. Does NOA change? No. Cash and CSE are Non-Operating Assets or Liabilities, so NOA remains the same, and so does Enterprise Value.