I understand why leverage makes equity value change faster than enterprise value, but can you explain why equity value changes slower than enterprise value in a cash only transaction-as you referenced? Thanks
Sure. Total equity value (TEqV) and total enterprise value (TEV) change at the same rate when net debt is $0, and TEqV=TEV. That may be the case in a cash-only transaction, but in many growth investments GPs put excess cash on the balance sheet to fund growth initiatives. These have net debt TEV, so if both go up by $100, the relative (%) change in TEqV will be less. Here is a video on it: ruclips.net/video/3XC3JE2vMgc/видео.html
I understand why leverage makes equity value change faster than enterprise value, but can you explain why equity value changes slower than enterprise value in a cash only transaction-as you referenced? Thanks
Sure. Total equity value (TEqV) and total enterprise value (TEV) change at the same rate when net debt is $0, and TEqV=TEV. That may be the case in a cash-only transaction, but in many growth investments GPs put excess cash on the balance sheet to fund growth initiatives. These have net debt TEV, so if both go up by $100, the relative (%) change in TEqV will be less. Here is a video on it: ruclips.net/video/3XC3JE2vMgc/видео.html
@@MikeReinard that’s helpful. Thanks, Mike.