Question

A local family business is facing a decision. Constantine’s Grocery has been a landmark company in a small city in the USA. Over the past 60 years, what began as a single fresh fruit and vegetable store became a full service grocery store chain with many stores throughout the city. Constantine is incorporated with only 6 shareholders, all family members. The decision it is facing is how to raise much needed capital to maintain its current business operations and to allow the possibility of growth in the future. The family believes it needs an additional $135 million dollars. This sum is too large for a bank line of credit and no one in the family has additional funding to invest into the company. The family is considering other alternatives.

One alternative is to publicly issue debt (corporate bonds), the other alternative is to issue common stock to the public.

In this paper, describe the process (in detail) of how a public offering occurs. A chronological account of how most public offerings would be an appropriate format, although not required.

In addition, discuss the impact and implications of each alternative.

How does each alternative affect control over the company?

As a small family business, the internal affairs and finances of the company were well guarded from the public view by the family. How does this change?

What are the financial reporting effects of this decision?

How will additional debt impact future earnings? How will new stockholders change the management of the company?

Superior papers will explain the following elements:

Provide a narrative about the impact of issuing stock to the public. The narrative will include the topics of loss of control of the company and the requirements that future financial statements will be available to the public.

Provide a narrative about the impact of issuing debt to the public. The narrative will include the topics of potential loss of the company if debt covenants are breached and the requirements that future financial statements will be available to the public.

Provide a narrative on the initial public offering (IPO) process using at least four research sources outside the textbook material. The narrative of the IPO process steps should include the (a) role of investment banker, (b) deal negotiation, ( c) preparation and submission to the SEC of the registration statement, (d) SEC approval, ( e) setting an issue date, and (f) setting an issue price.

Answer 1

There are 3 ways to expand business 1) by issuing common stock(ipo),2) by issuing debt, 3) by internal accruals

here we will first discuss by issuing common stock

Process for an ipo

-here ipo can be done by company by registering f-1 this can be primary offer where company issue it's share or secondary offer where existing share holders will issue their share to the public.

role of investment bank: - investment bank perform the key role as an advisory , underwriters of the ipo.They basically perform duty as a bridge between the company or selling shareholders and investing public by purchasing ipo share from the company and reselling them to public.

company appoint lead bookrunner with consultation of investment bank

there can be direct listing where investment bank perform the role of only advisor and not of an underwriter.

Regulations filing with sec :- The working group will produce several draft of the registration statement before it's initial filling or submission with sec , As per 2017 procedure the company which has submitted registration form confidentialy have to make it public at least 15 days prior to commence ment of road show.

The sec's role for the procedure is ensure adequate disclosure norms and not to measure quality of the stocks , here after 30 days of initial filling sec will provide the company with the comment letter to the company which includes many disclosure ,and risk factors.

above process will be repeated until the sec has no further comment.

Deal procedure:- once all sec comments are clear preliminary prospectus wich includes a price range for the ipo shares based on the company's valuation and desirable deal size .

Prior to pricing the ipo the company and lead underwriters request the SEC to declare the registration statement effective , and after the registration statement has been declared effective the ipo is priced the underwriting agreement is executed .

Comments on the expansion plan through debt:-

here company will retain it's controlling stake, however financial burden in form of interest payment will increase which will eventually lead to the lower profit after tax, however if company is trading on equity it means they are generating more return on the amount that has been borrowed by them over the required interest payment then company will be at favourable stance.

Comment on financial effect of expansion plan through equity:-

Here company will lose control if of more then 50% shares been offered to public, further here every quarter company required to circulate abridged financial statements and full fledged financial statements at the end of the year, more over company's eps will be lowered due to increase in the number of shares.