Corporate Finance Transactions, Valuation, and M&A
This domain tests whether you can value a business on internally consistent assumptions, structure a transaction, and tell an acquirer whether the deal creates or destroys value per share.
Core rules
- DCF consistency: FCFF discounted at WACC yields enterprise value; FCFE discounted at Ke yields equity value. Never cross the two.
- Terminal value: Gordon growth (g below WACC and no higher than long-run nominal GDP growth) or an exit multiple applied to the final forecast year's metric.
- Multiples: EV/EBITDA pairs with enterprise value and allows capital-structure-neutral comparison; P/E pairs with equity value. Apply forward metrics for forward valuations and normalize for non-recurring items.
- IFRS 3: allocate consideration to identifiable assets and liabilities at fair value; the residual is goodwill; NCI is measured at fair value or at the proportionate share of net assets.
- Accretion/dilution: compare pro forma EPS with standalone EPS, including after-tax synergies and after-tax financing cost.
- Structure matters: share versus asset purchase, cash versus stock, earnouts, and the tax consequences to each side.
Worked example
Acquirer net income $200M, 100M shares, EPS $2.00. Target net income $30M, price $600M funded entirely with new debt at 6% pre-tax, tax 25%, synergies $10M pre-tax, no new shares issued. Pro forma net income = 200 + 30 + 10 × (1 − 0.25) − 600 × 6% × (1 − 0.25) = 200 + 30 + 7.5 − 27 = $210.5M. EPS = $2.105, so the deal is 5.25% accretive. Accretion is not proof of value: test whether the multiple paid is supported by the same synergy and growth assumptions used in the DCF.
Traps that cost marks
- Discounting FCFE at WACC or FCFF at Ke.
- Setting g at or above WACC, or burying margin improvement inside the terminal growth rate.
- Comparing the target's EV/EBITDA with the acquirer's P/E.
- Ignoring financing mix - an all-stock deal at a low acquirer P/E is dilutive even with synergies.
- Booking announced run-rate synergies in year one.