EV Impact Events

Question 1

How to answer EQ Value events

Answer 1

1. Does Common Shareholders’ Equity (CSE) change?
   if yes –> Equity Value changes by the amount that CSE changes

else no change

2. Do Net Operating Assets (NOA) change?
   if yes –> EV change by NOA amount (does not matter which investor)

Question 2

A company issues $200 in Common Shares. How do Equity Value and Enterprise Value change?

Answer 2

CSE increases by $200, so Eq Val increases by $200.

TEV stays the same

Question 3

A company issues $200 in Common Shares, and it uses $100 from the proceeds to pay Dividends to the common shareholders. How does everything change?

Answer 3

CSE increases by $100 after both changes, so Eq Val increases by $100.

TEV stays the same

Question 4

The company decides to use the $200 in proceeds from new Common Stock to acquire another business for $100 instead. How does everything change?

Answer 4

Eq Val increases by $200

$100 remains in Cash
$100 Operating Asset

TEV increases by $100

Question 5

What happens if this company issues $200 in Debt to fund a $100 Asset acquisition instead?

Answer 5

Eq Val no longer changes

If operational asset –> TEV increase by 100

Question 6

A company issues $200 of Debt to fund a $200 Equity Purchase Price acquisition of a company with $150 in Common Shareholders’ Equity.

Answer 6

TEV increases by $200 because NOA increases by $200

Question 7

A company issues $100 in Preferred Stock to purchase $50 of PP&E. How do Equity Value and Enterprise Value change?

Answer 7

Preferred Stock issuances flow into Preferred Stock within Equity,
not Common Shareholders’ Equity

Eq Val stays the same

TEV increases by $50

Question 8

Now the company issues $100 in Preferred Stock to repurchase $50 of Common Stock. How do Equity Value and Enterprise Value change?

Answer 8

Eq Val decreases by $50

TEV Stays the same since cash offsets it

Question 9

A company issues $150 of Debt and $50 of Common Stock to acquire $175 of PP&E and $25 of Short-Term Investments. How do Equity Value and Enterprise Value change?

Answer 9

Eq Val increases by $50

NOA increases by $175, and TEV also increases by $175

Question 10

Current Equity Value represents the Market Value of ALL Assets.
But if that’s the case, why doesn’t a $100 Debt issuance boost Equity Value?
The company receives $100 in extra Cash from this issuance, which should boost its Total Assets.

Answer 10

1) Equity Value represents Net Assets, not Total Assets.

2) And Current Equity Value represents the Net Assets’ market value only to Equity
Investors.

Eq Val does not change in this scenario because Common Shareholders’ Equity does not change,

Question 11

A company purchases $100 of Inventory using Cash. How do Equity Value and Enterprise Value change?

Answer 11

Eq Val stays the same

TEV increases by $100

Question 12

Now assume the Inventory is sold for $200 and walk me through how the entire process from beginning to end affects Equity Value and Enterprise Value.

After bought for 100 with cash

Answer 12

Eq Val increases by $75

TEV stays the same since cash is not operating

Question 13

A company collects $200 of cash from a customer upfront for a service that it has not yet delivered. How do Equity Value and Enterprise Value change?

Answer 13

Eq Val stays the same

NOA decreases by $200 because the Deferred Revenue is an Operating Liability

TEV decreases by $200

Question 14

Now, the company delivers the service to the customer and recognizes the $200 as Revenue, along with $100 in Operating Expenses. Walk me through how the entire process from beginning to end affects Equity Value and Enterprise Value.

Answer 14

Eq Val increases by $75.

TEV stays the same

Question 15

A CEO finds $100 of Cash on the street and adds it to the company’s bank account. How do Equity Value and Enterprise Value change?

Answer 15

Eq Val increases by $100

TEV remains the same

Question 16

A company experiences a disaster at one of its factories and records a $100 PP&E Write Down. It also decides to issue $50 in Common Stock to get the funds required to replace this
factory in the future. How do Equity Value and Enterprise Value change?

Answer 16

Eq Val is down by $25.

TEV decreases by $100

Question 17

A company has excess Cash. How do Equity Value and Enterprise Value change if the company uses the Cash to repay Debt vs. repurchase Common Stock?

Answer 17

TEV stays the same