We have a company with EV 10
Equity value 6, debt 6, cash 2
What happens to EV if we use our cash balance of 2 for a project with an NPV of 2?
That depends on what we get when we invest the 2 cash.
The exact wording for the question is: “What happens to EV if Company uses $2bn cash to invest in a new project with an NPV of $2bn?”
This was a mock interview question. Thanks
If you acquire any assets with the expenditure your EV will increase by the value of those assets.
^not necessarily. EV is takeover price. short answer: ev goes up to 12, but it depends on how market responds.
if you use 2b cash to buy assets, cash goes down, so the ev goes up. “it gets more expensive” to take over cuz u aint receiving the cash.
market cap is equity value. and this will fluctuate on the news. if people think that the cash was not used wisely, ev will drop, making it cheaper to takeover.
but if they love the idea of how you used cash, market cap will rise making its more expensive to take over.
this also applies to debt. as ev is the market value of both equity and debt!