If capital structure changes due to equity dilution or debt issuance, what should you update in the model?

• A. Only update revenue projections.
• B. Update cash, equity, and share count; adjust WACC and related metrics; reflect in EPS and debt ratios.
• C. Only adjust the tax rate.
• D. Ignore changes to debt covenants.

Answer: (B)

When you change how a company is financed, you’re changing the funding mix, which touches the balance sheet, income statement, and valuation metrics. If equity is issued, you receive cash and expand the equity base, increasing common stock and additional paid-in capital and raising the share count. That dilution reduces earnings per share unless net income rises proportionally, so you must recalc EPS with the new diluted share count. The larger equity base also shifts the weights used in the weighted average cost of capital, so WACC and related metrics must be updated to reflect the new cost of capital mix. If debt is issued, you gain cash but also higher liabilities and interest expense, which changes pretax income, taxes (via the interest tax shield), net income, and leverage ratios. The new debt level alters debt-to-equity and debt-to-EBITDA metrics and other coverage measures. In short, capital structure changes require updating cash, equity (and share count), WACC, EPS, and debt-related ratios to keep the model accurate. Revenue, tax rate, and covenants aren’t driven directly by financing choices in the same way, so they aren’t the primary targets of these updates.