When a company raises debt to buy back shares, what effect does this have on its Enterprise Value?

When a company raises debt to buy back shares, the overall Enterprise Value remains unchanged. Enterprise Value (EV) is a measure of a company's total value, often considered a more comprehensive alternative to market capitalization. It accounts for the company's equity value and adds debt while subtracting cash and cash equivalents.

When a company buys back shares using debt, it increases its liabilities (debt) while simultaneously reducing its equity (as shares are taken off the market). However, the increase in debt is exactly offset by the reduction in equity. Therefore, the overall effect on the Enterprise Value is neutral, as both components adjust in such a way that the total value remains the same. This outcome relies on the assumption that the buyback doesn't impact other variables such as cash flow or operational performance.

Understanding the impact of share buybacks on capital structure and Enterprise Value is crucial, as it highlights the balance in finance between equity and debt without ultimately changing the company's total valuation in the market.