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

Author

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  • Tom W. Miller

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.

Suggested Citation

  • Tom W. Miller, 2018. "Terminal values for firms with growth opportunities: explaining valuation and IPO price behavior," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 35(2), pages 244-272, June.
    • Handle: RePEc:eme:sefpps:sef-03-2016-0078
    DOI: 10.1108/SEF-03-2016-0078
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    Citations

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    Cited by:

    1. Demetri Tsanacas, 2022. "Valuation Challenges in High Tech Platform Based Corporations," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 89-100.

    More about this item

    Keywords

    Valuation; Growth options; Growth opportunities; IPO pricing; Terminal value; G12; G31;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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