Terminal values for firms with growth opportunities: explaining valuation and IPO price behavior
Document Type
Article
Department
Economics, Finance and Quantitative Analysis
Publication Date
3-17-2017
Abstract
Purpose The purpose of this paper is to use fundamental models incorporating structural relationships within the firm in a terminal value model for the second stage of a two-stage valuation model utilized to estimate the value of a company. Design/methodology/approach The innovation is that growth options are identified within the structural relationships and a model capturing the value of the optionality is incorporated in the second stage of the two-stage valuation model. Findings Significant outcomes are that terminal value is shown to be a large portion of a company’s total value and the price behavior for initial public offerings produced by the model is consistent with the result of empirical studies. Originality/value This paper explicitly incorporates growth options in the second stage of a two-stage valuation model for the firm.
Journal
Studies in Economics and Finance
Journal ISSN
1086-7376
Volume
35
Issue
2
First Page
244
Last Page
272
Digital Object Identifier (DOI)
10.1108/SEF-03-2016-0078