Question

What happens to Enterprise and Equity Values if you issue $1000 worth of shares? What if you repurchase $1000 worth of shares?

a) Both Enterprise and Equity Values increase for issuing shares; both decrease for repurchasing shares.
b) Both Enterprise and Equity Values decrease for issuing shares; both increase for repurchasing shares.
c) Enterprise Value increases for issuing shares, decreases for repurchasing shares; Equity Value increases for issuing shares, decreases for repurchasing shares.
d) Enterprise Value decreases for issuing shares, increases for repurchasing shares; Equity Value decreases for issuing shares, increases for repurchasing shares.

Answer 1

When a company issues $1000 worth of shares, both the Enterprise Value and Equity Value increase. Conversely, when a company repurchases $1000 worth of shares, both the Enterprise Value and Equity Value decrease.

Step-by-step explanation:

When a company issues $1000 worth of shares, both the Enterprise Value and Equity Value increase. This is because issuing shares infuses the company with additional capital, which increases the company's value. By issuing shares, the company increases its equity financing, which leads to an increase in both Enterprise Value and Equity Value.

On the other hand, if a company repurchases $1000 worth of shares, both the Enterprise Value and Equity Value decrease. Repurchasing shares reduces the number of outstanding shares, which decreases the equity financing and reduces the company's value. Consequently, both Enterprise Value and Equity Value decrease when shares are repurchased.