Valuation of an IPO is morecomplex than for a mature company...

Valuation of an IPO is morecomplex than for a mature company given the typical lack of operating historyand the fact that the IPO company is usually growing quickly and makingsubstantial investments in their business. That being said, part of the IPOprocess is developing a set of pro forma financial statements presenting therecent operating history of the business as well as projections under varioussets of assumptions about the future. There is, naturally, uncertainty aroundfuture projections for a young business so projections can only provide ageneral guideline for future results.

The projections are used to drive comparableanalysis which examines the IPO company to its peers around measures such asprice to earnings (P/E), price to book (P/B) and cash flow ratios. The key tomaking these projections and comparisons useful is the role of the underwriter.One of the reasons that investment bankers can command large fees is that theyhave extensive experience in the market and lots of insight into theinstitutional investors who will purchase much of the share float from an IPO.

The bankers work out the pricing to attractsufficient demand at the highest price possible to maximize the proceeds fortheir client while leaving room for investors to participate in future upside.But oftentimes the price of an IPO rises in trading right after it goes public.Sometimes this can mean that money was left on the table, but other times, likein Facebook's IPO, the share price fades after the initial enthusiasm. Bankershave to walk a fine line to not over-price an IPO as much as they don't want tounder price it. One situation impedes their ability to attract new IPOcandidates while the other impedes their ability to find buyers for the nextIPO. Overall, it's a bit of financial engineering combined with intuition,experience and market credibility.

When fully diluted this company (at $0.025 per share)will be valued at $17,650,350 which is 706214000 shares. Retail shareholders will likely hold 240,000,000.

The potential problem of shares valued at such a low amount might be that they are viewed as a ‘penny dreadful’ and traded accordingly rather than as a legitimate business.