Question

a) Discuss two advantages and two disadvantages of going public for firms.

b) A company makes an initial public offering of shares to raise $220 million, at an offer price of $5.30 per share. The issue is underwritten at $5.00. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $800,000. If the firms’ share price closes at $6.40 on its first day of trade. What is the total cost of the IPO?

c) Explain two important roles of investment bankers in the process of IPO.

Answer 1

a)Advantages and disadvantages of a company going public

The financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development (R&D), fund capital expenditure, or even used to pay off existing debt.

Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers. Subsequently, this may lead to an increase in market share for the company.

Even with the benefits of an IPO, public companies often face several disadvantages that may make them think twice about going public. One of the most important changes is the need for added disclosure for investors.

In addition, public companies are regulated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC).

c) Role in IPO

• Before issuance of IPO company hire an investment bank. This bank is chosen based on different criteria like market reputation, industrial experience, quality of research and distribution channels, etc.
• Selected banks do underwriting process where it acts as a broker between investors and issuing company.
• Investment bank works out on financial detail of IPO in the underwriting agreement.
• Post that company files registration statement along with underwriting agreement with SEC.
• Post-approval of IPO by SEC underwriter and issuing company decide offer price and a number of shares to be sold.
• After issuance, the bank carries out aftermarket stabilization in which that bank analyzes aftermarket stabilization and creates a market for the stock.
• The final stage is a transition to market competition, After 25 days period, the bank provides an estimate regarding the valuation and earning of the issuing company.

Investment bank helps a company to set everything and list IPO in a stock exchange. IPO is one of the major investment banking functions. This bank in return charges commission from a company