The founders and owners of a private company have funded it through the followin

Question

The founders and owners of a private company have funded it through the following rounds of investment: Round Source Price Number of Shares Class A Self $1.00 200,000 Class B Angel $1.00 300,000 Class C Venture Capital $1.25 400,000 The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $5 million. The price of shares is set using average price-earnings ratios for similar businesses of 17.0. What will be the IPO price per share? Select one: A. $22 B. $12 C. $45 D. $36

Explanation / Answer

Total Number of shares after IPO = 200000+300000+400000+1000000= 19,00,000

Net Income = $ 50,00,000

Earning per share = 50,00,000/19,00,000 = $ 2.63

Price Earning Ratio = Mkt price per share / Earning per share

17 = MPS / 2.63

MPS = 45

IPO Price per share = $ 45

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