Question

What happens to a company's Enterprise Value and its EV / EBITDA if it raises $100 of Debt?

Answer 1

When a company raises debt, its Enterprise Value (EV) does not change, but the EV/EBITDA ratio decreases.

Step-by-step explanation:

When a company raises $100 of Debt, its Enterprise Value (EV) does not change because the debt increases the company's assets and liabilities equally. However, the company's EV/EBITDA ratio will decrease because the debt increases the denominator (EBITDA), while the numerator (EV) remains the same. This means that the company's valuation multiple decreases, indicating a potentially lower value for the company relative to its earnings.