The Daily Technical #99: Which multiples are the most popular in valuation?

Good morning. Welcome to the 99th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
If a company raises $250 million in additional debt, how would its enterprise value change?

When a company raises $250 million in additional debt the enterprise value remains unchanged.

Enterprise value is structured to be neutral to changes in capital, meaning the added debt doesn't affect it directly.

The increase in cash from the debt theoretically offsets the increase in debt, resulting in no net change to enterprise value.

However, it is crucial to consider the potential indirect effects. Financing costs, such as fees and interest, could reduce the company's profitability, which, in turn, might lead to a lower valuation due to the higher debt burden.

Common Mistakes

1. Overlooking that enterprise value is not influenced by capital structure. Emphasize that adding debt increases cash, balancing the equation and leaving enterprise value unchanged.

2. Ignoring how market perceptions or significant changes, like increased debt levels, might affect a company’s stock price.

TL;DR

• Enterprise value remains unchanged when additional debt is raised

• Enterprise value is capital structure neutral.

• Added debt increases both cash and debt balances, which offset each other.

• Indirectly, financing costs (fees, interest) may reduce profitability.

TODAY’S QUESTION
Which multiples are the most popular in valuation?

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