What moves EV, and what only moves equity value
“A company raises $100 of debt. What happens to its enterprise value and equity value?”
These rapid-fire “what happens if” questions test whether you can run the bridge in your head instead of reciting definitions.
EV only moves when the operations change. Pure financing moves (borrowing, issuing shares, paying dividends) shuffle claims without changing the business.
The two-step test
Step 1: did shareholders put money in or take money out? If so, equity value moves by that amount. Step 2: run the bridge (equity + debt + preferred + NCI − cash) with the new numbers. Whatever's left is the change in EV.
- 1Raise $100 of debt and hold it as cash: debt +100, cash +100 → neither value changes.
- 2Issue $100 of new shares: equity +100, cash +100 → equity value +100, EV unchanged.
- 3Pay a $50 dividend: equity −50, cash −50 → equity value −50, EV unchanged.
- 4Spend $100 of cash on a factory: cash −100, equity unchanged → EV +100.
- 5Borrow $100 to pay a dividend: debt +100, equity −100 → equity value −100, EV unchanged.
These are theoretical answers. In real markets, a dividend or a debt raise can move the share price for other reasons (signaling, risk). Say “in theory”, then mention it if there's time.
Acquisitions follow the same logic. Buying a business with cash raises EV (cash becomes operations) but not equity value. Buying it with new stock raises both, since new shares were issued and new operations were added.
Say it like this
In theory, raising $100 of debt and holding it as cash doesn't change either value. Debt goes up by $100 and cash goes up by $100, so they cancel out in the enterprise value bridge, and nothing has changed for the shareholders. Enterprise value only changes when the operations change, for example if the company uses that cash to buy a factory.
Traps to avoid
- ✕Saying EV rises when a company raises debt (it forgets the cash raised).
- ✕Saying a dividend lowers EV. It lowers equity value; the business is unchanged.
- ✕Forgetting that spending cash on operating assets raises EV even though equity value is flat.
What they'll ask next
›What about a share buyback?
Same as a dividend: cash goes to (selling) shareholders, so equity value falls and EV is unchanged.
›And converting $100 of convertible debt into stock?
Debt −100, equity +100: EV unchanged, equity value up.
›The share price jumps 10% on good news. What happens to EV?
It rises by the same dollar amount as equity value, since debt and cash didn't move.
Check yourself
A company raises $100 of debt and keeps it as cash. What happens to equity value and EV?
Put it all together
Count every share, run the full bridge, and judge the multiple against peers.