Valuation & Deals: key terms, formulas and examples
Valuation estimates what a business is worth. Mergers and acquisitions are checked by due diligence, and present value converts future cash into today's money.
Example
A deal that pays 110 next year is worth about 100 today at a 10% rate.
Takeaway
Never pay more than discounted future cash, and verify claims before signing.
Key terms
- Due diligence
- Careful checking of a deal before committing.
- Merger
- Two companies join to form a single new one.
- Acquisition
- One company buys control of another.
- Goodwill
- Extra value paid in an acquisition above the worth of identifiable assets.
Formulas
Debt-to-equityD ÷ E
WACCE% × Re + D% × Rd
One-year NPVCF ÷ (1 + r) − I
Present valueFV ÷ (1 + r)ⁿ
Enterprise valueMarket cap + D − Cash
Enterprise valueMarket cap + D − Cash
Return on invested capital (ROIC)NOPAT ÷ IC × 100
Post-money valuationV + I
Investor ownershipI ÷ V × 100
Ownership dilutionN ÷ (O + N) × 100
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