Chapter 17, BOC Model, Part I
Pricing a New Stock Issue
Based on the P/E multiple, the company's value is:
Based on the M/V multiple, the company's value is:
There would also be a DCF valuation, but we will work with the $205 million.
Next, the company will have to have a stock split to get the price down to the desired range; use $15/share.
Split ratio =
new for 1 old.
If D'Mello had this number shares outstanding, here's the resulting EPS and book value per share:
Resulting book value per share
The company will have to raise $10,000,000 / 0.93 =
Now the company mustl sell these new shares at $15 to raise the required funds:
As noted above, the company and its investment bankers would undoubtedly also do a DCF analysis, and they would
privide lots of information in the prespectus.
Still, the above analysis shows the essential outline of the
procedures that would be followed.
course, if the company and the bankers could convince investors that the new funds could be invested to
earn more than the rate of return currently being earned, then the stock might be sold at more than $15 per share,
but if investors were worried about the offering--think asymmetric information--then the price might be lower.
If rather than an IPO, the company was already publicly traded, the market price would be the basis for the offering
The offering price would probably be lower than the current market price, but it might be higher if investors though
great things would be done with the proceeds.
A company wants to have an IPO and raise $10 million to finance a new plant.
Currently it has 1,000
shares of stock outstanding, its last reported earning figure was $5 million, and its book value is $70
Comparable companies sell at a P/E of about 20 and have a Market/Book ratio of about 3
The investment bankers want to price the shares at about $15 per share.
How should the