Face Value in IPO refers to the valuation of a firm before the stock is publicly traded. An investment banker’s study of the firm and its prospects is frequently used to estimate the face value. This establishes the price per share that will be paid for the shares in the IPO. Once the face value has been determined, a price for each share offered in the stock market can be determined.
Meaning of Face Value in IPO
When a company issues an IPO, the face value, also known as the par value or nominal value, is the fixed value of the share determined by the company. The procedure by which a corporation acquires funds for development and expansion is known as an initial public offering (IPO).
In its accounts and share certificates, the corporation lists the face value as the initial value of its stock. In addition, the face value is always the same. It is immutable. It’s an important parameter for calculating stock market value, premiums, and returns, among other things.
You may also read about: What is DRHP and RHP?
Face Value’s Importance
The importance of Face Value in IPO is:
- Assists in determining the current value of a stock.
- Assists in calculating premiums
- It’s crucial for determining profits.
- Calculates the interest rate.
During stock splits, companies also use the face value of a stock. A stock split occurs when a firm divides its existing shares into several new shares. A stock split is when the face value of a stock is divided to make it cheaper.
Let’s say the share price of a company’s stock, which has a face value of Rs. 10, has risen to Rs. 3,000. The corporation splits one share into five to boost the number of shares and liquidity. Following the split, each share will have a face value of Rs. 2 and a share price of Rs. 600.
Face value is often used by businesses to calculate dividends, which are the portions of annual profits delivered to shareholders. For example, if a firm’s share with a face value of Rs. 10 is currently selling at Rs. 3,000 and the business declares a 10% dividend that implies the corporation will pay out Rs. 1 per share.
What factors go into determining face value in IPO?
Divide the company’s net worth by the number of shares issued to get the face value. The difference between a company’s assets and liabilities is its net worth. The face value of 100 new shares issued by a corporation with a net worth of Rs. 1000 will be Rs. 10.
You may also read about: What is Grey Market impact on IPO?
What are the Different Methods for Determining Offer and Market Value?
The worth of a company’s shares before it goes public is referred to as face value in business. This is also known as the stock’s par value. When a company goes public, its face value is used to calculate the price at which investors will offer shares.
Companies will elect to conduct a secondary offering or sell more stock after a particular period to raise funds for expansion or acquisitions. They accomplish this by issuing a new prospectus with updated information and selling additional shares at whatever price they want. This price can be greater or lower than the previous pricing, depending on how optimistic they are about their company’s future.
The fundamental distinction between the offer price and market value (i.e. face value) occurs in two ways:
- The corporation may wish to maintain the share price low to attract additional investors (less demand). To optimise their selling, they will set a higher offer price.
- Although the offer price is normally fixed, market pricing can change over time. Even if you purchase shares at the issue price, there is no guarantee that you will be able to sell them for the same price if you sell them later; some variance is to be expected.
For an investor who is merely looking for a profitable investment, face value is unimportant. Face value, on the other hand, is still a significant idea for a retail investor. To put it another way, learning about face values can help you measure the success of your investment if you want to become a company investor.