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)
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.
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.
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.