David found a company and goes through the investment rounds shown below:
He decides to take the company public through an IPO,issuing 2 million new shares.Assuming that he successfully completes the IPO,the net income for the next year is estimated to be $8 million.His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses,which is 15.0.What will be the IPO price per share?

Question

David found a company and goes through the investment rounds shown below: 
He decides to take the company public through an IPO,issuing 2 million new shares.Assuming that he successfully completes the IPO,the net income for the next year is estimated to be $8 million.His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses,which is 15.0.What will be the IPO price per share?

Quizplus · Accepted Answer

To determine the IPO price per share, we need to first calculate the company's market value using the price-earnings ratio and projected net income:

Market Value = Price per Earnings Ratio x Projected Net Income
Market Value = 15 x 8,000,000
Market Value = 120,000,000

Since the company is issuing 2 million new shares, the IPO price per share can be calculated as follows:

IPO Price per Share = Market Value / Number of Shares
IPO Price per Share = 120,000,000 / 2,000,000
IPO Price per Share = 60

Therefore, the IPO price per share will be $33.33 (C)

David Found a Company and Goes Through the Investment Rounds