Topic 23

Fair Return on a Deal

Topic 23 addresses what a fair return to reasonably expect on a deal is and provides insight into and methodology to determine a fair return. The proper determination of a fair return provides the basis for the discount rate used in discounted cash flow (DCF) and other valuation.

The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this Topic or are available for review and download on the companion Web site noted at the end of this Topic.


  • What is a fair return to expect on a given deal? It depends: the long-term return on Treasury bills, mutual funds, stocks, the Standard & Poor's index, what your venture capital fund or hedge fund manager friend tells you is possible, and so forth.
    • All of them are fair answers.
    • What separates them is risk.
  • Realistically, a fair return to expect on a deal is what you should expect to earn on an investment with equivalent risk and opportunity as the deal target—your opportunity return.1
  • For business acquirers, the most frequently used, and somewhat controversial, target return used to determine the investor's required return on equity in valuing deals is that resulting from the capital asset pricing model (CAPM).


  • CAPM is an opportunity-based return—what you can expect to get elsewhere ...

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