How to determine the IPO stock price?

Question

Given the initial earnings per share $4, net income growth 35%, and sales growth 15%, common stock price (at par) $345,000.
Is it applicable to use CAPM for the industry average?

Can the IPO price be calculated based on company's data?

Answer 1

The industry average beta is not generally a good move for IPO firms. The industry average usually contains mature firms & they act differently to the market.

The best approach is to get a few similar companies and look at their betas. Since betas are affected by the leverage, you need to unlever the betas. Take a market-weighted average of these betas (remember to include the value of debt -- most people use the par value). Then you can assume that this value is the unlevered beta for the IPO firm. You need to relever the beta to get the cost of equity for the IPO firm. You can get the formula for levering & unlevering beta in any standard introductory finance book -- like Brealey & Myers.

Since IPOs are usually priced below true market value (on purpose) -- don't expect your answer to be a good predictor of the IPO price.

Answer 2

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