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,

1-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.

2- discuss the impact and implications of each alternative. How does each alternative affect control over the company?

3- 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?

4- What are the financial reporting effects of this decision?

5- How will additional debt impact future earnings?

6- How will new stockholders change the management of the company?

Superior papers will explain the following elements:

1-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.

2-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.

3- 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

Process of IPO

IPO is the initial public offering of a company. It is the first step taken by the organization to raise capital through the stock market. When a company wants to go public then the first thing that they should do is hiring an investment bank. The company must have a good team of managers and professionals who are capable of guiding the company when the company goes public. The investment bank will help the company to decide about the amount of money that they can raise the type of securities that can be issued etc. This is done by a group of underwriters. After all the details of the IPO are decided then the investment bank sends the registration statement to the Securities Exchange Commission.

The registration statement contains information about the company, their financial statements, corporate governance norms etc. The symbol of the company, after it gets listed is also decided by the SEC. After the registration statement is put in the SEC, it takes some time to verify the details of the organization. This period is known as the cooling off period. Once the SEC is convinced about the details and the information given by the company then the IPO of the company is introduced in the stock market.

If the company is a good one then the IPO will be oversubscribed. The investors try to get the stock of the company during IPO as the price of the IPO is comparatively less than the market price of the stock after getting listed in the market.

Impact of issuing stock to the public:

When a company goes public then it has to issue shares to the public. This implies that the company will receive money from the public in return for issuing the shares of the company. By issuing shares the company will be losing its rights over the company. The shareholders will also become the owners of the company and any decision of the company has to be taken in co-ordination with the shareholders as well. The company will have to maintain proper financial records so that the shareholders of the company are able to analyze the information properly and easily.

Impact of issuing debt to the public:

In case the company decides to issue debt to the public then it will have to issue bonds. The issuing of bonds implies that the company has taken loan from the public and in return it will be giving bonds to the public. The bondholders will be paid an interest amount for investing their money in the bond. The bondholders have taken a risk by giving the loan to the company so they deserve to be paid an additional amount of interest.

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?

The family business had their finances and internal affairs well guarded from the public but after issuing stocks or bonds the business will no longer be able to keep anything related to the business as private. Everything about the business will be public. This is the major change that will occur in the company after they decide to use other sources of financing.

What are the financial reporting effects of this decision?

The financial reporting will change as the company is now answerable to the public for its activities. Since the company has now taken money from the public so all their transactions have to be properly recorded and they have to be reflected in the annual reports of the company.

How will additional debt impact future earnings?

Any additional debt that the company takes will have to be repaid off on time. So the additional debt will have a major impact on the money earned by the company. The earnings of the company will have to be utilized for paying back the debt taken than using it for any other purpose. Thus, the future earnings of the company will reduce.

How will new stockholders change the management of the company?

The new stockholders will become the new owners of the company. They will have ownership rights over the company. So the management structure of the company will change.