Question

Question 5.

Provide a reason why a privately-held firm is valued higher/lower than comparable publicly-held firms. To get the full mark, you must discuss both cases.

Answer 1

Case 1:Privately-held firm is valued higher than comparable to publicly-held firms.Usually private firms are valued higher as it includes less procedure in incorparating the firm and even while making and implementing decisions relating to the firm.Where as in a public company a lengthy procedure and process has to be followed inorder to incorporate the public firm.Even decision making and implementing is not easy in publicly-held firm.But in a privately-held firm,a decision which increases the firm's profits can be immediately implemented and can be put into action.Since privately-held firms doesn't include more number of people in its management,so it is easy for the firm to sanction more number of raw materials by eliminating intermediaries and this decreases fraud and manipulation in supply of raw materials.By using these raw materials,privately-held firms closely observe and inspect the quality of output and makes sure that best quality products are produced.But,in a publicly-held firm,as there are more number of people in its management,it would be difficult to control manipulation and even goods produced are not of best quality like privately-held firms.Privately-held firms have greater revenue as best quality products are sold to consumers.Hence these are the reasons why privately-hled firms are valued higher than publicly-held firms.

Case 2:Privately-held firm is valued lower than publicly-held firm.A publicly-held firm is valued higher than privately-held firm, since public companies can have access to funds from people.But,privately-held firm cannot allow maximum people to contribute funds or shares towards the firm.Where as publicly-held firm can attain a large amount of funds or shares to be subscribed by common people.There is job security for employees and workers who are working in a publicly-held firm.In a privately-held firm,there si no job security for its wokers and if firm attains losses then it terminates or reduces number of workers or employees.Shareholders of a publicly-held firm can easily buy or sell their shares,but, in privately-held companies,it is difficult for shareholders to buy or sell their shares.Publicly-held companies attain maximum profits since they are granted with more tax and duty exemptions.Hence,privately-held firm is valued lower than publicly-held firm.