NPV of an M&A transaction?
So we often use DCF as a way of valuing companies. The PV of future cashflows indicate roughly how much we should pay for the company. But if PV=Purchase price, the NPV of the transaction is actually 0, so what's the point in doing it? Obviously, no one will be paying the exact number the DCF will show you, as its used in conjunction with other valuation methods, and also you have the issue of synergies - but if the price you're paying reflects all the potential future benefits (cash flows, synergies), then NPV is zero, right?
Yes, but your expected return is equal to your discount rate (i.e. hurdle rate). It's not like your expected return is zero if you engage in a transaction where the NPV is zero.
What a company is worth is reflective of the return that an investor demands given the amount of risk he/she feels like they're taking on. That's why you bid up until you hit this valuation and stop there.
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