Question

Why a company would consider going public? What are some of the advantages and disadvantages?

Attention: Explain. Please answer in the form of paragraph, no bullet points or numerical and I will rate. Thank you in advance!

Answer 1

Answer: A firm is said to be “going public”when it sells stock to the public for the first time. A company’s first stock offering to the public is called an “initial public offering(IPO).”Thus, Randy’s will go public if it goes through with its planned IPO. There are several advantages and disadvantages to going public:

Advantages to going public:

•Going public will allow the family members to diversify their assets and reduce the riskiness of their personal portfolios.

•It will increase the liquidity of the firm’s stock, allowing the family stockholders to sell some stock if they need to raise cash.

•It will make it easier for the firm to raise funds. The firm would have a difficult time trying to sell stock privately to an investor who was not a family member. Outside investors would be more willing to purchase the stock of a publicly held corporation which must file financial reports with the sec.

•Going public will establish a value for the firm.

Disadvantages to going public:

•The firm will have to file financial reports with the SEC and perhaps with state officials. There is a cost involved in preparing these reports.

•The firm will have to disclose operating data to the public. Many small firms do not like having to do this, because such information is available to competitors. Also, some of the firm’s officers, directors, and major stockholders will have to disclose their stock holdings, making it easy for others to estimate their net worth.

•Managers of publicly-owned corporations have a more difficult time engaging in deals which benefit them personally, such as paying themselves high salaries, hiring family members, and enjoying not-strictly-necessary, but tax-deductible, fringe benefits.

•If the company is very small, its stock may not be traded actively and the market price may not reflect the stock’s true value.The advantages of public ownership would be recognized by key employees, who would most likely be granted stock options, which would certainly be more valuable if the stock were publicly traded