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Equity+Debt values

This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.

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February 23, 2018 at 9:05 am #438544
herocomesalong
Member
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Good day tutor,
This has been bugging me for a long time…is it right to say that a bidder will pay for the total firm value (equity plus debt) of the target if it wishes to pay off the debt itself, but will only pay for the equity value of the target if it does not wish to settle the target’s debt obligations?
If that is right, wouldn’t it be unfair to the bidder since it will have to pay the target the debt value and THEN settle the debt in the future?
February 23, 2018 at 2:33 pm #438571
John Moffat
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- Topics: 57
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You are confusing the amount they end up paying in total, with the amount they will pay to the equity.
If they take over the debt, then although the total value of the firm is the debt plus the equity, they will only pay the equity the value of the equity.
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