Having previously identified the location of its greenfield investment, Acme, a multi-billion dollar public MNE that is incorporated in the U.S., must next obtain financing for its proposed overseas production facility. It has been estimated that the acquisition will cost $500M and all funds will be secured in the U.S. Your job is to explain to this committee some of the financial aspects of this acquisition.
Deliverable: At the next steering committee meeting, you will provide a detailed presentation of the characteristics of the various financing alternatives, including the advantages and disadvantages of each. Your report should conclude with a recommendation of which alternative (or combination of alternatives) should be used to finance the overseas investment.© BrainMass Inc. brainmass.com June 1, 2020, 2:51 pm ad1c9bdddf
YOUR COMPANY SHOULD GO IN FOR A PUBLIC ISSUE
Many potential investors will never invest in a private company, because their stock is not liquid. Once they buy in, they're somewhat "stuck" with the stock, unless / until there is a major event like the sale of the company. However, if your company is publicly traded, even on a smaller board such as the OTCBB or Pink Sheets, their investment is liquid. This liquidity reduces their risk. This usually makes it easier for you to raise money.
· A public company has direct access to the capital markets and can raise more capital by issuing additional stock in a secondary offering. Public companies can also more easily raise funds privately. The more money your company can attract, the higher its valuation. The higher its valuation, the more your personal net worth is as a large shareholder of the company. For example, if the company raises $1mm and the book value doubles, the value of the assets underlying your stock doubles. Often this is reflected in stock price by the rule of thumb method of 3x book value. So if the company had 1mm shares outstanding and a book value of $1mm, then the company might trade at $3 per share .
· Public companies can use their stock to attract and retain good employees. Good employees in turn create more efficient and effective operations. Better operations translate into higher earnings which translate into higher share prices. Higher earnings attract investors because they lower the P/E ratio. Investors enter the market and buy your stock which makes the price go up. The price will go up, as a basic fundamental Supply/demand function of economics until a new point of equilibrium is reached. A higher stock price means a higher net worth for you.
· Being a public company is more prestigious than being a private company. Let not this prestige be overlooked. Often because of transparency, many lenders, vendors and suppliers will be more apt to do business with the company because of the increased credibility. And being the CEO of a public company vaults you into an elite class of executives as the number of public companies are only a small fraction of the plethora of private companies.
· Going public provides owners and founders an exit for selling their ownership holdings in the business. It's referred to as the "ultimate exit strategy" because it provides the business owner with a paced and controlled exit, meaning it's over time which can allow you to manage the process, extracting higher value as you go.
· Public companies are generally worth more than private companies. The public companies that compose the Standard & Poor's 500 are valued at about 17 times their earnings (i.e ., a company earning $1 million would be worth $17 million ), while private companies are typically bought and sold at one to five times cash flow. Higher valuation means more money in your pocket.
Going Public Advantages
Access to Capital
A public offering of stock can vary from 500,00 to over 1 billion. In 1999, 544 companies completed an IPO(Initial Public Offering). The total capital raised from these offerings was 23.6 billion. By offering stock for sale to the public a company can access a substantial source of corporate funding.
If a company needs to raise capital, it can sell stock(equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.
Through a public offering founders suffer less dilution when raising capital. Once ...