Treasury Shares and Enterprise Value

CFA Level I Equities
#1

Hi everyone,
I got a question which made me think: "There are two identical firms A and B. A owns 10% treasury shares, while B doesn’t. Given that:

  • EV (Enterprise Value) of A is equal to EV of B
  • EV of A is lower than EV of B
  • EV of B is lower than EV of A"

In my opionion, treasure shares do not affect EV and so I would answer that EV of A is equal to EV of B, given that the two firms are identical (same revenues,… and same FCFO).
However, I am still uncertain. How would you interpret this question?

Thank you in advance!

#2

EV is market cap plus net debt. Market cap is shares outstanding times the price per share. Shares outstanding will go down after a buyback of stock but cash will also go down (net debt increases) which negates the impact of the buyback on EV.