How is an IPO valued?

An IPO (Initial Public Offering) is valued using three main methods: Absolute Valuation, Relative Valuation, and Economic Valuation. Each method helps determine a fair price for the company before it goes public.

1. Absolute Valuation

   Focuses on the company’s intrinsic value using financial fundamentals:

   • Discounted Cash Flow (DCF): Estimates future cash flows and discounts them to present value.
   • Dividend Discount Model (DDM): Used for dividend-paying companies to value future dividends.
   • Asset-Based Valuation: Calculates value by subtracting liabilities from asset values.
2. Relative Valuation

   Compares the IPO company with similar companies using industry benchmarks:

   • P/E Ratio: Price relative to earnings per share.
   • Price-to-Sales Ratio: Market value compared to revenue.
   • P/B Ratio: Market value relative to book value.
3. Economic Valuation

   Considers broader economic impact and strategic flexibility:

   • Economic Value Added (EVA): Measures value creation after covering capital costs.
   • Real Options Valuation: Assesses the value of future decision-making flexibility.