The Guidance Price
The Guidance Price is usually considered an accurate price guide.
In some IPO roadshows, if a share were higher than what was recommended by underwriters, then there would be no need to sell at that price.
It is seen as a reasonably accurate measure of demand during the book-building process.
The Guidance Price may also result in more people showing interest in buying shares because they know they can always get it cheaper later. It will boost confidence and help generate marketing momentum for an IPO launch.
However, some issuers and investment bankers might not want this to happen since it may cause them trouble when placing the new shares on the market.
Close Parallel Market (CPM)
CPM is probably the most commonly used way to value upcoming IPO shares. It means that you take two companies in industry A and compare them with two companies in industry B to see which ones are more similar.
It is like saying, “if you were given company X or Y, then what would be a fair price?” The average of the four prices should be somewhere near their intrinsic value. It can also include using other financial ratios such as the P/E ratio, etc.; this valuation method might not always work because no two stocks will always behave exactly alike.
Discounted Cash Flow Valuation Method (DCF)
This method disregards the market value of a company. It uses the valuation method that is closest to how a business owner would value their own business by taking cash flows at a future time and discounting them back to the present day.
DCF tries to determine what price will generate an acceptable rate of return for investors.
If you apply this method, the investor must decide on the WACC (weighted average cost of capital). The higher the risk, then it might be more expensive as well as the lower the risk, then it will be cheaper.
This valuation mechanism also takes into consideration not only today’s value but also in future years’ values – which means if a company has promising growth potential, then its share price may easily outperform inflation over some time.
Comparables Valuation Method (CVM)
This valuation method is where you compare with companies that are similar in size and key performance indicators such as P/E ratio etc., and choose the one with the most attractive price so that it will be representative of your target company’s worth.
By doing this, you should get a rough estimate of what your company might be worth in due course.
For example, if Company A has a P/E ratio of 10 and Company B has a P/E ratio of 16. Company A’s share price would be divided by the number 3, giving an equivalent market value for Company A equal to 33% higher than Company B.
Some analysts prefer to use DCF or CVM to estimate their company’s intrinsic value/price correctly. In contrast, others who are more reliant on the market will prefer the Market Multiple Valuation Method (MMM), which involves looking at other companies in the same sector with similar key performance indicators.
This method relies solely on the assumptions and inputs provided by investment bankers.
If they were overpriced, then there might be no demand, and if the price were undervalued, then there might be no shares left for when you do want them.
Market Multiple Valuation Method (MMM)
With this method, you take a company’s earnings per share and multiply it by the market price of its stock to get an estimated value of your business.
You can find out which companies are in the same industry or sector as yours because they will have similar characteristics such as size, growth potential etc., so it is easier for comparison.
This valuation mechanism also looks at not just today’s value but future value over time – which means if a company has promising growth potential, then its share price might easily outperform inflation over some time.
After all these different valuation methods have been deducted, it is up to the issuer to set a fair price for new shares to generate maximum revenue and not give investors too much discount.
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