Valuation of New Private Companies

Paper Summary:

This paper discusses how the valuation process for new private companies occurs in two phases. It explains that the first phase is the pricing evaluation and that the objective of this phase is to determine the initial offering price for shares in the new company. It also discusses the second phase which is the market evaluation, and how the results of this phase reflect the actual worth of the new company based on the market?s response to the company?s initial public offering (IPO). IPOs are equity stock issues when a corporation first initiates public trading of its shares.

From the Paper:

"With respect to market pricing mechanisms, the valuation analysis must provide answers to three questions. First, which market multiples are used by the comparable firms for pricing? "Most consistently profitable companies tend to price off their P/E or price-to-cash-flow ratios, while unprofitable or unpredictable firms tend to price off book value" (Bielinski, 1990, p. 65). Second, are any unique expectations or circumstances reflected in how the market prices each comparable firm? Factors such as "aggressive growth expectations, depression due to recent poor performance or a host of special circumstances (takeover rumors, pending litigation, valuable real estate holdings, a new patent application, an approaching retirement) can skew a stock's price and weaken comparability" (Bielinski, 1990, p. 65). Third, how do the current stock prices of each comparable firm compare to their historic prices? Do "the current specific multiples and general market multiples fall near the high or low end of their historical ranges, and do they continue or reverse a trend" (Bielinski, 1990, p. 65)?"

More papers on Valuation of New Private Companies:

• Research Paper # 24507 : "Valuation Of New Private Companies"
• Analytical Essay # 140681 : "Impact of Mercenary/Private Security Companies"
• Business Plan # 22626 : "Nike, Inc."

APA Citation:

MLA Citation: