Case 3 Soltn
1. What are the advantages and disadvantages of going public? Do you agree with Dan’s concerns or do you concur with other members of the Short family regarding the issuance of an IPO? Explain why?
Soltn: An Initial Public Offering (IPO) is the first sale of stock by the company. Generally, IPO’s are raised by small companies looking to generate capital needed to expand their business. Although further expansion is benefit to a company there are advantages and disadvantages of issuing an IPO:
Advantages: There are many benefits of going public and raising capital. Capital raised through IPO can be used to pay off debt, finance expansion plans, fund research & development and other capital expenditures. Other benefits also include visibility in the market as firm goes public, which may lead to increase in market share.
Disadvantages: Even with the benefits of an IPO, firms often face many challenges as well. The firms must meet the rules and regulations set by Securities Exchange Commission (SEC) especially for small start-ups the requirements can be very high. Firms lose control as public buys IPO’s, which leads to constant scrutiny of company and decisions made by management. Raising funds through IPO creates unwanted pressure on management to give high returns to its investors. This may lead to unethical practices.
Dan’s concerns are well founded. The decision to go public depends on company’s willingness to lose control and the amount of funds needed by the firm. If the funds needed for expansion cannot be generated through banks, IPO is an option for Short family as long as they are willing to give some control of their firm. 2. Comment on Lisa’s preference of the Corporate Value Model. Based on her approach, what would Citrus Glow’s selling price be if they were to issue 30 million shares?
Soltn: An Initial Public Offering (IPO) is the first sale of stock by the company. Generally, IPO’s are raised by small companies looking to generate capital needed to expand their business. Although further expansion is benefit to a company there are advantages and disadvantages of issuing an IPO:
Advantages: There are many benefits of going public and raising capital. Capital raised through IPO can be used to pay off debt, finance expansion plans, fund research & development and other capital expenditures. Other benefits also include visibility in the market as firm goes public, which may lead to increase in market share.
Disadvantages: Even with the benefits of an IPO, firms often face many challenges as well. The firms must meet the rules and regulations set by Securities Exchange Commission (SEC) especially for small start-ups the requirements can be very high. Firms lose control as public buys IPO’s, which leads to constant scrutiny of company and decisions made by management. Raising funds through IPO creates unwanted pressure on management to give high returns to its investors. This may lead to unethical practices.
Dan’s concerns are well founded. The decision to go public depends on company’s willingness to lose control and the amount of funds needed by the firm. If the funds needed for expansion cannot be generated through banks, IPO is an option for Short family as long as they are willing to give some control of their firm. 2. Comment on Lisa’s preference of the Corporate Value Model. Based on her approach, what would Citrus Glow’s selling price be if they were to issue 30 million shares?