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Up23
Hi everyone,
I got the following question: “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 BEV of A is lower than EV of BEV 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!
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Up5
@Dt98 – I would have chosen EV of A is lower than B.
EV has the component ‘market value of common stock’ = market value of shares x number of shares outstanding (NOSH).
As NOSH includes the number of treasury shares, you need to deduct this out to get the correct market value of common stock, therefore EV of A is lower than EV of B.
Is this the right answer?
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Up2@Dt98 – I would have chosen EV of A is lower than B.
EV has the component ‘market value of common stock’ = market value of shares x number of shares outstanding (NOSH).
As NOSH includes the number of treasury shares, you need to deduct this out to get the correct market value of common stock, therefore EV of A is lower than EV of B.
Is this the right answer?
I haven’t received any feedback yet, but as soon as I get it I will let you know.
I think your reasoning makes sense, and I was actually thinking the same. But then I thought of a company that repurchases its shares. In that case, the decrease in “Market value of common stock” would be compensated by an increase in Net Debt (therefore, EV is not affected). However, the question is different (we are talking about two different companies which are identical) and this is puzzling.
For example, should two “identical” companies have the same Net Debt? If this is the case, I completely agree with you.
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