Final answer:
The enterprise value of a company does not change when the company raises debt and keeps it as cash on its balance sheet because the increase in both cash and debt offset each other.
Step-by-step explanation:
Ceteris paribus, if a company raises debt and keeps the entire amount as cash on its balance sheet, the enterprise value (EV) would not change. The EV is calculated as the market value of equity (stock) plus debt, minus cash.
When a company raises debt, its debt increases, and if it keeps the money as cash, its cash balance also increases by the same amount. These two changes offset each other, leaving the enterprise value unchanged.
Regarding the provided reference on interest rates and bond valuation: When the interest rate rises from 8% to 11%, the present value of future cash flows decreases because they are discounted at a higher rate, thus reducing the value of a bond.
This concept underscores the inverse relationship between interest rates and bond values, but does not impact the enterprise value in the scenario where a company simply raises debt and holds onto the cash.