Question

Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds: Investor Round Series A Series B Series C Date Feb. 2013 Aug. 2014 Sept. 2015 You Angels Venture Capital Shares 500,000 1,300,000 2,300,000 Share Price ($) 1.50 1.00 3.25 It is now 2016 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 6.5 million new shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast that 2016 net income will be $6.5 million. a. Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2016 forecasted earnings average 21.3. Assuming that your IPO is set at a price that implies a similar multiple, what will be your IPO price per share? a. Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2016 forecasted earnings average 21.3. Assuming that your IPO is set at a price that implies a similar multiple, what will be your IPO price per share? The IPO price will be $1 per share. (Round to the nearest cent.)

Answer 1

Input:

Round	Date	Investor	Shares	Price per Share	Amount
Series A	Feb-13	You	5,00,000	$                   1.50	7,50,000
Series B	Aug-14	Angels	13,00,000	$                   1.00	13,00,000
Series C	Sep-15	VC	23,00,000	$                   3.25	74,75,000
IPO	Dec-16	Public	65,00,000
Total			1,06,00,000

Solution:

The total earnings forecast for 2016 is at $65,00,000. Post IPO, the total number of shares will be 10600000.

Therefore, Earnings Per Share (EPS) is $0.61.

Given P/E is 21.3, therefore share price at the time of IPO will be P/E * EPS = 21.3 * $0.61 = $13.06