Question

A company recently announced that it would be going public. The usual suspects, Morgan Stanley, JPMorgan Chase, and Goldman Sachs will be the lead underwriters. The value of the company has been estimated to range from a low of $5billion to a high of $100billion, with $45billion being the most likely value. If there is a 30% chance that the price will be at the low end, a 10% chance that the price will be at the high end, and a 60% chance that the price will be in the middle, what value should the owner expect the company to price at

Answer 1

Expected Value = $38.5 Billion

Hence,

Owner should expect $385 billion dollars to be the value of his company.

Step-by-step explanation:

Data Given:

High end Value = $100 billion

Probability of High end value = 10%

Low End Value = $5 billion

Probability of low end value = 30%

Most Likely Value = $45 billion

Probability of value in the middle = 60%

We can use the following formula to calculate the value that owner should expect on the basis of above given data and information.

Expected Value = Probability of Low end value x Low end Value + Probability of High end value x high end value + Probability of value in the middle x most likely value.

Expected Value = 30% x $5 Billion + %10 x $100 billion + %60 x $45billion

Expected Value = (0.30 x 5) + (0.10 x 100) + (0.60 x 45)

Expected value = (1.5) + (10) + (27)

Expected Value = $38.5 Billion

Hence,

Owner should expect $385 billion dollars to be the value of his company.