Advantages and Disadvantages of Going Public - Essay Example

?Question advantages and disadvantages of going public Going public in business basically means that an organization would start selling its shares in the market and as the company sells its shares, the status of the company changes from privately held company to a publicly owned organization (Arnold, 2008). There are several complications that an organization has to face, however going public has several advantages and there have been many firms that have changed their status from a private company to a public company. Advantages for an organization for going public Although going public is an expensive process but there are several advantages. Some of the most important advantages for going public are as follows: More capital can be raised by a company if it starts floating its share in the market. By floating shares in the market, company can have a better growth rate. People know and recognize more about companies whose shares are in the market rather than firms that are privately owned. Going public is a way to brand and market the company as well. It also builds the brand image of the company and the company becomes more reliable and trustworthy (Glueck , 1980). Because of being a better and more renowned company, a public company is able to attract and retain better human resource which helps in improving productivity level of the company. While acquisitions, shares of the company can be used instead of cash. Debt to equity ratio of the company improves because of going public as the capital raised is included in the equity section rather than liabilities. Debt to equity ratio is one of the ways lenders analyze and assess the risk of the company and it explains the amount of debt the company has in comparison to its liabilities. Organizations can motivate employees by offering them stock options which are considered more valuable than other rewards like cash and bonuses. Disadvantages for an organization for going public Besides the advantages of going public, there are several disadvantages because of which many organizations do not go public and float their shares in the market. The most important disadvantages which restrict an organization from going to public are as follows: Going public is an expensive process and if an organization has other ways or options to raise money then it should go with the alternatives rather than floating shares in the market. There are several fees and costs associated with going public like accounting fees, expense allowance of underwriter, filing fees, cost of travelling, cost of printing and legal fees and all these costs are to be included while analyzing whether the firm would go public or not (Hoch, Kim, Montgomery, and Rossi, 1995). In addition to this, if the management of the company is not aware about the process of going public then it should not indulge in such activities because it is a difficult process and they should go public only when the management is not aware about the whole process and complications involved in it. Information about the company increases and more people know about the organization in comparison to the time when the organization was operating as a privately held company. Customers, suppliers, shareholders, investors, analysts, and other stakeholders of the company tend to focus a lot on the organization and strategies which it has adopted. As the company goes public, it has to follow the requirements of SEC and financial reporting of the company has to be in accordance with the rules and guidelines provided by SEC (Kaplan, and Atkinson, 1998). Top management or entrepreneurs could feel like as if they have lost the control of the organization and thus it can have an impact on their decision making and productivity. Remuneration and compensation packages paid to the top management of the organization are known to others because public information and everyone would be aware about the salaries of people at the top managerial level. Because of going public, risk of shareholder litigation increases. Many shareholders are investing in short term; therefore an extra pressure is put on organizations to improve their earnings (Jaffe, 2007). So, David Atkinson needs to consider both the advantages and disadvantages of going public and should take decision after carefully analyzing the pros and cons of going public. Question #2 Factors affecting the conditions of demand for new owner occupied housing There are several factors that influence the demand of a product and thus the management needs to identify and evaluate continuously such factors. John Atkinson, the sales and marketing Director should also know the following important factors that could affect the demand for new owner occupied housing: Price: One of the major factors that affect the demand of any product is the price. Demand of the product and price are inversely proportional and as price of the product increases, its demand decreases (Hotelling, 1932). Therefore if the prices of construction or prices of houses increases, then it would reduce the demand for new owner occupied housing however if the prices decreases, then the demand would increase. Consumer Purchasing Power Purchasing power of the target market or consumer is another important factor that affects the demand for new owner occupied housing and as the consumers do not have high purchasing power and it would be difficult for firms to cover the cost of construction. So, because the purchasing power of the consumer is low therefore the demand would be low. Subsidies given by the government Subsidies paid by the government would also reduce the final price of the product and thus it would attract more people to buy the product. Factors affecting the conditions of supply for new owner occupied housing Number of firms in the industry One of the most important factors that affect the supply of any product or supply for new owner occupied housing is the number of firms in the industry. As the industry has been very competitive and there are several competitors are in the industry therefore with more competitors or players in the industry, the supply for new owner occupied housing is high. Subsidies Because of subsidies paid by the government, the final cost of product or cost of construction for firms in the industry would reduce thus it would attract more competitors and it would increase the supply. Demand And Supply Analysis Showing Price Changes Over The Last 10 Years Question #3: Elasticity Price Elasticity Of Demand Price elasticity of demand is a measure of the relationship between prices and demand of a particular product or object. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price of the product. If there is no change in the demand of the product in response to the change in the price then the demand is inelastic, in this case the value of the price elasticity of demand is less than one (Tellis, 1988). On the other hand if the demand of the product changes considerably because of the change in the price then the demand is elastic, in this case the value of the price elasticity of demand is greater than one. The product is said to have unit elasticity if the price elasticity of demand is equal to one. Similarly, the product is perfectly inelastic if the value of the price elasticity of demand is zero. If this value is infinity then the product is said to be perfectly elastic. Some of the factors which directly influence the price elasticity of demand are: Close substitutes: If there are more close substitutes then the good will have high price elasticity of demand and there will be increases substitution. As there is no close substitute of homes, price elasticity is high. If the good is a necessity then the demand is inelastic and if the good is categorized as a luxury then there the demand is elastic. As homes are necessity goods, therefore the demand is inelastic. Portion of income spent: if the portion of the income spent by the consumer on the product is less, then the demand is more inelastic. As the amount spent is just once therefore it can be said that the demand is inelastic. Income Elasticity Income Elasticity and Impact on the Market for Executive Second Homes in Devon & Cornwall: The income elasticity of demand measures the response of the demand to the change in the income level of the consumer (Wessels, 2000). It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the income level. If the product under consideration is a luxury product then it will be income elastic and the value of the income elasticity of demand will be greater than one. On the other hand if the product is inferior then it will have negative income elasticity and the value of the income elasticity of demand will be less than zero. Normal goods are income inelastic and the value of the income elasticity is between zero and one. As the second homes are luxury goods therefore the demand of such goods would be be income elastic. Cross Elasticity Of Demand Cross elasticity of demand is used in order to measure and analyze the impact of the change in price of one product on the demand of another product (Leamer, 2009). It is calculated by dividing the percentage change in the quantity demanded of one product by the percentage change in the price of another product. If the two products are substitutes of each other then the cross elasticity of the demand for these two products will be positive. On the other hand if the two products are compliments of each other then the cross elasticity of the demand of these two products will be negative. In relation to the case study, the salary offered to the employees in the South West is relatively low hence this would directly influence the demand of the houses as the employees cannot bear the costs associated with the purchase of the land and construction. Elasticity Of Supply Elasticity of supply is a ratio of percentage change in quantity supply of a good to the percentage change in price of the product (Mankiw, 2009). Elasticity Of Supply and its Application to New House Building in Short and Long Run: Price elasticity of supply measures the change in the supply of the product in response to the change in the prices of the product. In the short term, the new house building will be low in comparison to the increase in the prices and will be relatively price inelastic because it will be difficult to mobilise the labour and capital involved in the production. On the other hand in the long run the new house building will be price elastic due to ease in the mobility of the labour and capital. question #4: garland construction rumour Market Structure The construction industry in which the company operates has the following characteristics: All the firms in the industry are offering identical products There is no firm in the market which is dominating and almost every firm has more or less the same market share. Buyers are aware about the prices charged by firms. Firms in the industry are price takers. Entry into the industry and exit from industry is easy for firms in the industry. All the above mentioned characteristics are of a perfect market and because of these characteristics the market is said to be a perfect competition. At times, such a market is also called pure competition. In a perfect competition market, firms tend to gain market share by offering products at a lower price than the competitors and they rely on producing more goods at a lower cost in order to gain more profits in the long run. Therefore in such an industry, with the increase in prices the demand of the product would reduce and supply would increase and an opposite situation would occur if the price of the product or prices of houses are reduced as it would reduce the supply but increase the demand. Current Competition Legislation May Impact If Garland construction takes over the seven firms in the industry then the market structure of the industry would change. It has been said that the market share of Garland construction would increase up to 67% and thus the bargaining power of Garland construction would be high in comparison to other firms in the market. As the number of firms would be reduced, therefore the new market structure would be termed as oligopoly. In an oligopoly market, there are only few firms and the market or industry is controlled by these few firms. In such a market structure, the larger portion of the market share is consumed by the leading firms which in this case would be Garland construction. Reference list Arnold, R 2008, Economics, South-Western Cengage Learning: Mason, OH. Glueck , W 1980, Business Policy and Strategic Management, McGraw-Hill, New York. Hoch, S, Kim, B, Montgomery, A, and Rossi, P 1995, ‘Determinants of Store-Level Price Elasticity’, Journal of Marketing Research, Vol. 32, No. 1, pp. 17-29 . Hotelling, H 1932, ‘Edgeworth's Taxation Paradox and the Nature of Demand and Supply Functions’, Journal of Political Economy, Vol. 40, No. 5, pp. 577-616.  Jaffe, J 2007, Corporate Finance, Pashupati Printers Pvt Ltd: Delhi. Kaplan, R, and Atkinson, A 1998, Advanced Management Accounting, Prentice-Hall, New Jersey. Leamer, E 2009, Macroeconomic Patterns and Stories, Springer – Verlag Berlin Heidelberg, Heidelberg. Mankiw, G 2009, Principles of EconomicsSouth-Western Cengage Learning, , Mason, OH. Tellis, G 1988, ‘The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of Sales’, Journal of Marketing Research, Vol. 25, No. 4, pp. 331-341. Wessels, W 2000, Economics, Barron’s Educational Series, New York. Read More