Fair Value of stocks

[King_Junior]

Hi there,

I am currently working on an assignment and would appreciate if someone could any learned maestro help with the following:

1. How to calculate the most probable fair market value of the unit trust at IPO?

2. How to calculate the most probable fair market value of the unit trust after a particular period i.e. say 6 months after floatation?


Any reference to useful links/ text books would be much appreciated.

Thanks in advance

King Jr

 

[danbradster]

At IPO you likely have past trading history and future projections in their prospectus and their offer price. The price is not set by the market, but the seller. It would easily be bad value. Fair value you'll have to calculate yourself from their history, projections, industry average PE and other things.

After IPO the price is being set by the market, this is likely to be more fair than the IPO price. The same valuing techniques would apply, with the addition of a quarterly and half yearly report.

I try to avoid IPOs and instead search for companies trading below fair value, eg. CUP listed in December and are ~20% below the listing price. It's a better deal for me.

 

[flimtrader]

If I'm not mistaken, might some of those other factors be how many shares are being offered and how much funding the company wishes to generate?

 

[snsdmonkey]

IPOs should generally be at below fair value for the company. That's because only those who are professional/semi-professional (ie. not mum and dad investors) would be interested and only if they are buying something for less than it's 'worth' if that makes sense.

 

[McLovin]

If this is for a uni assignment then you probably need to use CAPM/DCF. I'd estimate beta for the CAPM based on a basket of other similar securities, it will give you a ballpark discount rate for the DCF. For estimating the expected market return take a long run average of something like the All Ords Accumulation Index over say 20 years.

Like I said if it's uni then they want to see you apply the formulas not necessarily get an accurate result.

 

[Tysonboss1]

IPOs should generally be at below fair value for the company.

No, IPO's are generally over valued, When the market is really booming you will see an increase in IPO's.