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

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.

Citation

Miller, T.W. (2018), "Terminal values for firms with growth opportunities: explaining valuation and IPO price behavior", Studies in Economics and Finance, Vol. 35 No. 2, pp. 244-272. https://doi.org/10.1108/SEF-03-2016-0078