BVX Knowledge Base
BVX Knowledge Base
M&A University

Expected ROE (%)

See for general explanation.


Enter expected Return On Equity (ROE) by the buyer who is contributing the equity capital. BVX calculates ROE based on business's after-tax income, but this ROE is before personal taxes at the shareholder level. 


After-tax vs. Pre-tax ROE: For this paragraph we will call buyer's ROE as ROI (Return on Investment) so the point of this paragraph is easy to understand. BVX follows conventional definition of ROI. However, a clarification is needed; what traditional methods call an "After-tax ROI", BVX calls it a "Pre-tax ROI". Traditional methods, when they say "After-tax ROI", they mean after-corporate-tax ROI, but before personal taxes of the investor. BVX "Pre-tax ROI" is also an ROI before personal taxes of the investor. So both the traditional "After-Tax ROI" and the BVX ore-tax ROI" are the same. Then, why does BVX use a different convention? The reasons are 1) BVX believes return should be measured from an investor perspective. Investor measures return before personal taxes (Pre-tax ROI) and investor measures return after personal taxes (After-tax ROI, or more specifically After-personal-tax ROI), 2) Traditional methods imply "Pre-tax ROI" to mean "Pre-corporate-tax ROI". Such "Pre-corporate-tax ROI" concept is mathematically wrong and should not exist, because one should not measure an ROI on a cash flow that cannot be delivered to the investor.


Traditional valuation methods and BVX use the discounted cash flow (DCF) technique. However, they differ in the cash flow that is being discounted. BVX applies DCF technique to cash flow that is delivered to the equity investor and is based on investor's actual post-acquisition debt structure. Whereas traditional methods promote discounting earnings, or EBITDA, or EBIT, or Net Income (none of which are cash flow), or Free Cash Flow (which is not a delivered cash flow. In addition, whenever traditional methods use Free Cash Flow, it is either based on seller's debt structure, or industry debt structure or an assumed debt structure; but rarely, if ever, on investor's actual post-acquisition optimized debt structure. 


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