In case of EVA : We should take the POV of an Investor or Buyer
Hence, If the firm is sold to a new owner, the buyer has to pay the Market Equity value and must also repay the firm’s debts as per market value . & The buyer gets to keep the cash available with the firm, which is why cash needs to be deducted.
Question :Why he should pay the debt as per the market value what is the logic behind this can you tell me please
Also if the interest rate in the market rises it means the market value of debt decreases, would the lenders be ready to accept the repayment at lower value? Some might agree to sell the bonds at lower value since they could invest the money somewhere else at higher interest rate,but some might not due to capital loss
Enterprise value is often viewed as the cost of a takeover: In the event of a buyout, the acquiring company assumes the acquired company’s debt but also receives its cash. An alternative to estimating the value of equity is to estimate the value of the enterprise.
Enterprise value (EV) multiples are widely used in Europe, with EV/EBITDA arguably the most common. EBITDA is a proxy for operating cash flow because it excludes depreciation and amortization. EBITDA may include other non- cash expenses, however, and non- cash revenues. EBITDA can be viewed as a source of funds to pay interest, dividends, and taxes. Because EBITDA is calculated prior to payment to any of the company’s financial stakeholders, using it to estimate enterprise value is logically appropriate.
Using enterprise value instead of market capitalization to determine a multiple can be useful to analysts. Even where the P/E is problematic because of negative earnings, the EV/EBITDA multiple can generally be computed because EBITDA is usually positive. An alternative to using EBITDA in EV multiples is to use operating income.
In practice, analysts may have difficulty accurately assessing enterprise value if they do not have access to market quotations for the company’s debt. When current market quotations are not available, bond values may be estimated from current quotations for bonds with similar maturity, sector, and credit characteristics. Substituting the book value of debt for the market value of debt provides only a rough estimate of the debt’s market value. This is because market interest rates change and investors’ perception of the issuer’s credit risk may have changed since the debt was issued.
When interest rate rises in the market, yes, bond value declines, MV of debt would be lower, but the estimate once again is from the point of view of a takeover of the firm, who’d have to pay the current MV of debt only ( which is actually lower).
You said in the last line that have to pay current market value of the debt only(which ks actually lower) but my question is would they be ready to sell their bonds at lower price, won’t they want to hold it?