Question

3. Your investment banking client Uber is about to go public. You have gathered the following information concerning comparable companies whose stock is publicly traded:

IPO Pricing

Company	Price/Earnings Per Share	Price/Cash Flow Per Share	Price/Revenue Per Share	Price/Book
A	30	15	3.0	2.4
B	20	11	2.6	2.0
C	25	13	2.8	1.8
D	35	17	3.1	1.7
E	27	14	3.0	2.1

1. Calculate the average values for each multiple.
2. Using these average multiples estimate the implied price for Uber’s shares assuming Uber’s earnings per share are $0.50, cash flow per share are $1.00, revenue per share is $4.90, and book value per share is $7.10.
3. Assuming all five companies are equally reliable comparables, estimate a fair value for Uber’s shares assuming they are trading in the market.
4. Deduct a 10% discount from this [freely traded] price to arrive at a price for Uber’s IPO. What is the purpose behind the 10% discount?

Answer 1

D) We give a 10% discount to uber's prices because Uber is currently a private company and we are comparing it with a public company. So Shares of uber will command a liquidity premium (since it is private company not everyone can buy and sell) whereas in case of public company shares there is enough liquidity as anyone can buy and sell.
Also, the discount is applied because to get more investors on board and to ensure that all the shares are subscribed completely at the time of IPO