If a company changes its capital structure by issuing debt and using funds to repurchase stock, with no change in operating performance, what happens to EV multiples?

If a company changes its capital structure by issuing debt and using funds to repurchase stock, with no change in operating performance, what happens to EV multiples?

• A. They rise.
• B. They remain unchanged.
• C. They fall.
• D. They become volatile.

Answer: (B)

The concept: enterprise value (EV) reflects the value of a company’s operations to all investors, not how those operations are financed. If operating performance and assets don’t change, EV should stay the same even when financing moves from equity to debt. In this scenario, the company issues debt and uses that cash to repurchase stock. The debt increases, and the cash balance rises by the same amount and then falls by the same amount as the buyback, so net cash is unchanged. The equity value falls by the value of the repurchased shares, which exactly offsets the new debt in the EV calculation: EV = debt + equity - cash. With the operating assets and cash flows unchanged, enterprise value stays the same. Since the operating metric in the denominator (like EBITDA or EBIT) is unchanged as well, the EV multiples do not change. Small caveat: if debt changes affect risk, cost of capital, or future cash flows, EV could move and multiples could shift. But with no change in operating performance, EV multiples remain unchanged.

The concept: enterprise value (EV) reflects the value of a company’s operations to all investors, not how those operations are financed. If operating performance and assets don’t change, EV should stay the same even when financing moves from equity to debt.

In this scenario, the company issues debt and uses that cash to repurchase stock. The debt increases, and the cash balance rises by the same amount and then falls by the same amount as the buyback, so net cash is unchanged. The equity value falls by the value of the repurchased shares, which exactly offsets the new debt in the EV calculation: EV = debt + equity - cash. With the operating assets and cash flows unchanged, enterprise value stays the same. Since the operating metric in the denominator (like EBITDA or EBIT) is unchanged as well, the EV multiples do not change.

Small caveat: if debt changes affect risk, cost of capital, or future cash flows, EV could move and multiples could shift. But with no change in operating performance, EV multiples remain unchanged.