Let’s say we have two stocks that are the same in every way but one. Both have a market cap of $10 million. One has $5 million in debt, and the other has $5 million of cash in its bank account and no debt. Which one is cheaper? The company with $5 million in cash is cheaper than the one with $5 million in debt. But we can’t tell from the market cap alone. Both have an identical market caps of $10 million. Why is the company with $5 million in cash cheaper than the company with $5 million in debt? Let’s look at what happens when we acquire all of the shares of each company.
