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Question
‘While there are benefits of going public as a source of finance for a company, it also means additional obligations'.
Analyse and justify the statement.
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Solution
Benefits of going public -
- Access to capital - The primary advantage an entrepreneur stands to gain by going public is access to capital. In addition, the capital does not have to be repaid and does not involve an interest charge.
- Other advantages -
- Mergers and acquisitions: Public stock of a company can be used for businesses to grow through acquisitions.
- Higher valuations: Public companies are typically valued more than private companies.
- Benchmark trading price: The trading price of a public company’s stock serves as a benchmark of the offer price of other securities.
- Capital formation: Raising capital later is typically easier because of the extra liquidity for the investors.
- Less dilution: There is less dilution of ownership control compared to an IPO.
Drawbacks:
- Increasing accountability to public shareholders
- Need to maintain dividend and profit growth trends
- Becoming more vulnerable to an unwelcome takeover.
- Need to observe and adhere strictly to the rules and regulations of governing bodies.
- Increasing costs in complying with a higher level of reporting requirements.
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