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I.Statement of the Problem
III.Analysis of Alternative
I.Statement of the Problem
If the firm remains a partnership could the firm continue to compete on an equal footing with its competitors, would they be able to retain key employees? How would tangible as well as intangible assets be valued in its stock price as a public firm? Problem: What initial public offering valuation would be most appropriate for Goldman Sachs & Co. to use?
1. Industry Comparables
2. DCF model
III.Analysis of Alternatives
In order to compare Goldman Sachs to companies in its industry the information in Exhibit 2 of the case has to be used. A way to compare the information given to Goldman Sachs is to find the average of the comparable companies’ information to use it to find an approximate IPO for Goldman Sachs. The average of the price to book value ratios and the average of the price per earnings ratio would be are calculations that can be found in order to compare Goldman Sachs to its competitors. The average for the price to book ratio that was found came out to be 3.12 and the price per earnings ratio came out to be 18.38.
These numbers would be good to use as approximations for Goldman Sachs values. In order to find estimated stock prices the price to book ratio should be multiplied by the book value per share that was given. This would give a price of $48.80 for Goldman Sachs. Another estimated stock price could be found by multiplying the average price per earnings by the earnings per share that was given. This would give an estimated stock price of $62.86. The average of these two numbers would give a better estimate and that came out to be $55.83 which can be used as the estimate for what the IPO should be for Goldman Sachs.
In order to do a discounted cash flow model you have to know the cash flows of a company’s project or their total cash flows. In the case the total revenue and the pre-tax revenue are given and the projected growth rates. This can get to part of the cash flows that we are looking for to do the discounted cash flows model. It does not give other items that are needed such as the capital expenditure of Goldman Sachs and the Net Working Capital in order to find the change for the projected years to come. Another number we would need to find the IPO with this model would be a discount rate and some more information from the other companies that have gone public that Goldman Sachs can be compared to. This is why this model does not work well in order to find the IPO for Goldman Sachs. All of the numbers will be estimated amounts and not be able to properly give Goldman Sachs the IPO price.
Goldman Sachs should use their industry comparables in this case to value their IPO. There is more given information for the other companies to come up with a better number for Goldman Sachs. The IPO that was found was $55.83 which would be a good number for Goldman Sachs to start off with. This IPO price is a good estimate given from the information in the Exhibit and what I feel they should use as their IPO.
Comparables: Price/book average= (4.5+3.6+4.2+1.7+1.6)/5
Price/Earnings Average= (18.6+21.3+28.2+11.7+12.1)/5
Stock Price estimate= 3.12*15.64 =18.38*3.42
Average Stock Price= (62.86+48.80)/2