This is my first post and probably won’t be my last. Finance is proving a challenge to understand, and the ends to which one can go in finance are as far as the eye can see.
My question is about NPV and Shareholder Equity Split.
Say you found an investor and you told her:
“Ok, give me 1 million dollars of investment for 1/3rd of the company.”
Therefore, we can say that the valuation of the company is 3 million dollars.
Moreover, when we want to calculate the NPV, we want to get NPV = 3 million dollars to stick to our claims.
We show our investor all the WACC assumptions and Cash Flow assumptions and when we calculated the NPV over the next 5 years we got 3 million dollars NPV. She was happy. She put her money in.
So here’s my question:
NPV = Discounted Cash Flows (Years 1-5) - Initial Investment (Yr 0)
If the NPV is 3 million, and the Initial Investment is 1 million, shouldn’t then the Discounted Cash Flows of Years 1 through 5 be 4 million in order to obtain the NPV value we promised, the NPV promise that put the entire deal together? Is this the correct way to think about NPV and equity splits?
Thanks for the help!