What is a ‘Target Return’
A target return is a pricing model that prices a business based on what an investor would want to make from any capital invested in the company. Target return is calculated as the money invested in a venture plus the profit that the investor wants to see in return, adjusted for the time value of money. As a return on investment method, target return pricing requires an investor to work backwards to reach a current price.
Explaining ‘Target Return’
One of the major difficulties in using this pricing method is that an investor must pick both a return that can be reasonably attained, as well as a time period in which the target return can be reached. Picking a high return and a short time period means that the venture has to be much more profitable in the short-run than if the investor expected a lower return over the same period, or the same return over a longer period.
Further Reading
- Prospect theory and the risk-return association: An empirical examination in 85 industries – www.sciencedirect.com [PDF]
- Attitudes toward risk and the risk–return paradox: prospect theory explanations – journals.aom.org [PDF]
- The combined effects of free cash flow and financial slack on bidder and target stock returns – www.jstor.org [PDF]
- Target-firm information asymmetry and acquirer returns – academic.oup.com [PDF]
- Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns – onlinelibrary.wiley.com [PDF]
- Managerial risk preferences for below-target returns – pubsonline.informs.org [PDF]
- The impact of managerial ownership on acquisition attempts and target shareholder wealth – www.jstor.org [PDF]
- The returns to acquiring firms in tender offers: Evidence from three decades – www.jstor.org [PDF]
- Acquirer-target social ties and merger outcomes – www.sciencedirect.com [PDF]
