Question

Bumble Company is planning an IPO and management is meeting with their investment bankers to discuss the pricing strategy for this first time offering of the company's shares to the public. Bumble's CFO has spent a lot of time researching the price to earnings per share ratios (P/E Ratios) of several competitor companies, including Match which currently trades at $100 per share. The competitor P/E ratios range from 25-30x the next year's forecasted earnings per share. The CFO is forecasting Bumble's next year's earnings per share will be $3.20. He expects the Investment Bank to discuss a price range for the Bumble IPO of ...?
a. $100-$150 per share
b. $50-$100 per share
c. $80-$96 per share
d. Not enough information

Answer 1

Answer:

c. $80-$96 per share

Explanation:

given data

currently trades = $100 per share

P/E ratios = 25-30x

earnings per share = $3.20

solution

The company fixes the share price based on the P/E ratio

Price per share = Earning per share × P/E ratio      ............1

and

Lower end of price = Expected earning per share × Lowest P/E ratio      .......2

Lower end of price = $ 3.2 × 25

Lower end of price = $ 80

and

Higher end of price = Expected earning per share × Highest P/E ratio     .......3

Higher end of price = $ 3.2 × 30

Higher end of price = $ 96

So that here share price for the IPO will be in the range of $ 80 - $ 96 per share.