Final answer:
Raising $1000 of debt increases a company's Enterprise Value by the same amount but does not change its Equity Value. Repaying the debt decreases Enterprise Value, while Equity Value remains unchanged unless repayment affects the company's financial health.
Step-by-step explanation:
When a company raises $1000 of debt, for example by issuing bonds, its Equity Value remains unchanged because the transaction involves acquiring debt without directly affecting shareholders' equity. Instead, the Enterprise Value increases by the same amount of debt raised because Enterprise Value is calculated as Equity Value plus debt minus cash. The effect of repaying the debt is the opposite; paying off the debt decreases the Enterprise Value, while Equity Value remains unaffected unless the payment affects the company's solvency or financial stability.
Repaying the debt does not increase Equity Value directly; however, it can indirectly influence a company's perceived risk and, thus, its cost of equity. A company that steadily repays debt may be seen as more financially sound, which can lead to an increase in its stock price and therefore its Equity Value. When a company raises $1000 of debt, there will be an increase in the company's liabilities (debt) and a decrease in equity. This is because the debt represents a claim on the company's assets by the lenders, which reduces the ownership stake of the shareholders.
If the company repays the debt, there will be a decrease in liabilities (debt) and an increase in equity. Repaying the debt reduces the company's outstanding obligations and increases the ownership stake of the shareholders.