Question

Recently the social networking site Facebook had a successful Initial Public Offering (IPO) of its business. Write a report on the financial coverage of the financial securities. Is an IPO a primary market transaction or a secondary market transaction? Post IPO, what actions did the senior management take to maximize the shareholders’ interests? Give reasons. Using book Essentials of Corporate Finance

Answer 1

Financial securities are the sources of raising finance for the companies. These securities also gives opportunity to the investors to make investment in the desired companies. Hence overall we can say that these financial securities are the link between investors and companies.

IPO is know as initial public offer. In other words we can say that when companies issue securities first time in the market then it is known as IPO. IPO is known as first time issued securities.

We know there are two type of financial market; primary and secondary market. Both market serve the motive of raising finance but some difference is between both type of financial market are there.

Primary market is the financial market in which financial securities are issued first time by the companies. Hence IPO is the primary market transaction.

Now let’s see secondary financial market. Secondary financial market is known as stock market in which existing securities are traded. In other words we can say that when already existing financial securities are bought & sold by the existing shareholders in the financial market then such market is known as secondary market.

After issuing IPO, senior management is liable for various types of fair actions those are helpful in maximizing interests of the shareholders because interests of the shareholders are main for the senior management and these interests cannot be ignored any time.

Thus following actions should be taken by the senior management to maximize the interests of the shareholders;

1. Proper mission & goals of the company must be defined.

2. Formulation of correct and fair financial policies of the company.

3. A proper financial management policy.

4. A proper dividend pay-out policy.

5. A fair cash management policy should be adopted.

6. Good & reasonable capital structure.

7. More attention should be on wealth maximization not only on profit maximization.

8. A good human resource management policy.

9. Balance decision about the leverage status in the financial composition of the company.

10. A fair corporate governance policy must be implemented for achieving the goals of the company and good compliance with the rules & regulations etc.