Title

Terminal values for firms with growth opportunities: explaining valuation and IPO price behavior

Department

Economics, Finance and Quantitative Analysis

Document Type

Article

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

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