Question

a) You need more finance to expand your business. Briefly describe 3 (three) advantages AND 2 (two) disadvantages of going public (IPO). b) Other than an IPO, briefly describe 5 (five) alternative sources of finance you could explore to raise capital?

Answer 1

Firstly we shall discuss the brief advantages and disadvantages of raising Fund from initial public Offering (IPO)

The most often cited advantage often is money.the median proceeds received from an initial public offering were $94.5 million, and many offerings bring in hundreds of millions of dollars.For example, in 2016, the largest IPO—ZTO Express—netted $1.4 billion. other advantages being

1. Exit opportunity-An initial public offering is a significant exit opportunity for stakeholders, whereby they can potentially receive massive amounts of money, or, at the very least, liquefy the capital they currently have tied up in the company.

2. Publicity and credibilty- Analysts around the world report on every initial public offering in order to help their clients know whether to invest, and many news agencies bring attention to different companies that are going public.

3.Reduced overall cost of capital- Before IPO's companies often had to pay high interest rates . so ipo reducues overall cost of capital

4. Stock as a means of payment- Beinng a plublic company also allows company to use stock as a means of payment

Disadvantages.

1. Market Pressure- Founder have a long term vision for the company, on the other hand any person investing money in the capital markets may have different visions be it short or otherwise. which creates a markets pressure.

2. Potential Loss of Control- Other Major disadvantage of the IPO is that the company may loose control over the company.

Other alternatives to IPo's

1. Debt- If founders do not want to give up equity but are in need of capital, taking out debt may be a good alternative

2.Refinancing- Can also be an alternative where investors are seeking exit, Refinancing involves Restructuring a company's debt by adjusting interest rates.

3. Joint Venture- A joint venture is formed by two companies to share resources with an aim of achieving the common goal. could be a replacement for ipo.

4.Acquisution- The most common alternative to an IPO is to sell the company to a larger company. Being acquired, however, is only a good alternative when seeking a liquidity event

5.Private Placement- Private placement is the selling of shares of the company to a specific range of investors