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

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.