Question

Martha founded a company and took it through the investment rounds shown below: Round Source Price Number of Shares Series A Self $0.50 400,000 Series B Angel $1.00 400,000 Series C Venture Capital $6.50 300,000 Series D Venture Capital $7.25 400,000 She then decided to take the company public through an IPO, issuing 1 million new shares. Assuming that she successfully completes the IPO, the company’s net income for the next year is estimated to be $7 million. Based on advice from her investment banker, Martha will set the price per share for the IPO using the average price-earnings ratios for similar businesses, which is 15. What will be the IPO price per share?

Answer 1

Martha has already secured payment through various sources and now she is relying on her IPO source to complete the funding.

Total shares to be issued under IPO= 1 million new shares

Here the assumption is made that new shares can be common equity shares or prefernce shares or a combination of both.

Compnay's net income for next year is estimated to be $7 million

Now, Average Price earning ratio is calculated by dividing the Market Price of a share with the Earnings per share

Earning Per share(EPS) = Net income/ Total no of shares

Here, EPS= $7 million/ 1 million = 7

Hence Earning per share for company is $7.

Now Average Price Earning Ratio= Market Price/EPS

Which is , 15= Market Price/7

Market Price= 15/7

Which implies, Market Price=$2.1421

Hence IPO price per share= $2.1421