Change in equity value as result of paying down debt (2024)

Not sure wether this is entirely correct but ill give it a shot:

I believe its about perspective.

In the first LBO scenario, you are describing the process of generating cash over a period of multiple years, which is then used to pay off debt after each year. The equity value will rise from using this newly generated cash in future periods and the subsequent repayment of debt with this "new" cash, not the cash we already currently have at hand.

Your second scenario assumes repaying debt with cash at hand from a prior stock issuance (which is not considered right now).As ND in its simplified form is generally calculated as Debt - Cash (unrestricted), if we use existing cash to repay debt, it will make no difference as both figures go down by the same amount.

Any corrections to this are welcome

Equity Value when Repaying Debt (Originally Posted: 09/24/2017)

Hello, quick question regarding a particular interview question:

What happens to the equity value when you repay debt?

The answer says that equity value stays the same when you repay debt. If I'm not mistaken, equity value is defined as value of all assets related to the EQUITY SHAREHOLDERS ONLY. Therefore, when you are paying down debt, cash goes down, so shouldn't equity value go down? For a similar example, equity value goes down when you issue a dividend because cash (asset) goes down.

Help is greatly appreciated