Initial Public Offerings (IPOs)
Section outline
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This section provides a relatively simple model to better understand how IPOs affect the value allocation as well as the ownership structure of the issuing firm. After a brief overview of the model, we build it step by step, namely:
- Step A: Computation of the IPO net proceeds
- Step B: Estimation of the firm's post-IPO equity value
- Step C: Estimation of the market value offered to the primary investors
- Step D: Analysis of post-IPO ownership structure
- Step E: Computation of the number of shares that will be issued and sold
- Step F: Determination of the share issue price and the post-IPO stock price.
This simple model provides powerful insights into the relevant cash flows associated with an IPO, the pricing of the firm's shares, as well as the costs associated with an IPO. It also shows to what extent an IPO dilutes the ownership structure of a firm and why an IPO might still be a financially attractive way of financing, despite its substantial costs.The model is fully implemented in the Online Tool "IPO Mechanics," which is listed below.