Impact of share repurchases on equity value and enterprise value?
Would you mind providing the answer to the title?
It is clear to me that EQV increases, but I do not fully get why EV remains constant.
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EV is affected only by changes in Net Operating Assets.
Ask yourself what changes with a share repurchase? Cash and Common Shareholders' Equity (CSE). Cash doesn't count as an operating asset and CSE isn't even on the assets side of the balance sheet.
Thank you.
Could you explain it in easy steps?
My thoughts:
EQV increases:
- Share count decreases -> EPS increases (assumption: same P/E)
- BS: Cash reduced, equity (book value) reduced (treasury stock as counter part)
EV remains constant:
- EQV increases -> (EV increased through bridge)
- What is the counter part?
To directly answer your question with the equation from before, EqV + Debt - Cash = EV. EqV up and Cash down (spent on repurchasing shares). The “-“ in front of the cash and the actual negative cash creates a positive that offsets the drop in equity value.
However, taking a more theoretical approach, I’d recommend reading about The Modigliani–Miller theorem. It discusses how in a vacuum, financing decisions (share repurchases / raising debt etc) do not affect enterprise value
EPS is a a valuation metric, EPS is not on the balance sheet
Retired shares go in a contract equity account. When that goes up, your equity goes down.
Cash down, equity value down, enterprise value is unchanged
double
You're assuming P/E is held constant - in that scenario, your total equity value doesn't change at all, because the market is valuing your earnings at the same level as pre-repurchase. In that scenario, your EV would decrease because you're expending cash to repurchase shares, but your equity value is not changing. It is not a realistic scenario.
But your equity value does change… repurchased shares go in a contra equity account decreasing your equity value (by same amount as your cash used). Assumes full cash repurchase.
Neither equity nor enterprise value change. You’re using CASH to buy EQUITY. The thing is, cash is effectively equity. $1 of cash on a company balance sheets equates to $1 of equity value (think of how a balance sheet balances!).
.
A = L + OE
If Cash, an “A” goes down, and L is unchanged, then OE MUST come down. How? Contra equity account for treasury stock is where repurchased shares go.
If you use cash, EqV decreases and net debt increases, so EV stays the same.
This makes sense, as EV = net operating assets, so it should be (theoretically) independent of financial engineering.
Note this is all based off book values - in the real world, share prices increase if you announce buybacks.
Equity value decreases since cash is leaving the business and thus not available to investors after the buybacks. EV is unchanged.
So, is it basically the same concept as in a dividend payout?
But why are the ext books stating that the EQV increases?
You are using cash to buy equity
Repurchased shares go into a contra equity account
Using cash to repurchase shares
Cash is down. Your contra equity goes up, which means your equity goes down
Equity value decreases. Cash decreases same amount. Enterprise value unchanged (since EV has EQv MINUS cash, so EQv is neg and cash is neg, but it it is a double neg since you subtract cash in EV, and thus EV is the same
Source: ECM Village Idiot
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