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Stocks Perference - Essay Example

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As a company plans to go public, it has to keep in mind the interests of various parties. “The regulators to the issue will consider the following:
In my opinion, it is prudent to…
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Stock Preference Q1. Should ALLGR consider issuing common stocks and bonds or simply stay with the issuance of common stocks only? There are a numberof issues to be considered while coming out with an Initial Public Offering. As a company plans to go public, it has to keep in mind the interests of various parties. “The regulators to the issue will consider the following:
1.Experienced management and Directors
2.Conflict of interest between business and shareholders
3. Conflict of interest between Directors’ private affairs
4.Plans for the future and strategy
5.Recently audited financial statements”.[Ross Geddes]
In my opinion, it is prudent to consider issue of only common stocks instead of bonds and stocks for this particular issue. With the current market conditions and bleak economic scenario, it might not be advisable to consider issuing bonds. Interest rates have been nose-diving since the past couple of years and the response might not be all that great. Also, the company might find it difficult to pay out high interest, as the current global economic scenario is quite uncertain and might turn for worse any day. Once the management trainees are hired, we could decide on a sound strategy and growth pattern for the company and subsequently go in for the public issue after a period of three months at least. This time is required for the trainees to familiarize themselves with the working of the company and think about ways to improve the sales and profits. I would however not recommend having any of the new management grads on the board as the board members must be experienced people with excellent track records.
Q2. The possibility of implementing an employee stock purchase plan and wants you to briefly explain to him the mechanics and benefits of this type of a plan.
Employee Stock Option is a wonderful tool to retain talented employees and keep them happy. No doubt, this perquisite could be offered to the employees, especially the management trainees who join the company in the next few weeks. “Technically, under ESOP, a company offers its employees the chance (or option) to purchase a certain number of shares at a future point in time. Generally, these shares are offered at a pre-determined price, which as per the company’s expectations would be lower than the market price at the time when the employee can exercise the option (choose to buy). Of course, the reverse could be true, in which case the options have no value at all.”[Sify Business]
In case the employee chooses to leave the company before the vesting period, the stock option ceases to exist and the employee cannot benefit from it. We could keep the vesting period as five years to encourage the trainees to keep working with us.
Another advantage with ESOP would be the tax benefit for the company. Since the stocks would be a part of the employee’s compensation package, the employee would have to pay the tax on the amount and we would be saving that amount.
If a substantial part of the salary is offered as ESOP, we could be sure of the dedication of the employee to the job. Also, the chances of stock prices falling below a certain range would be very less, as a lot of floating stock would then be with the employees.
Thus, in my opinion, ESOP would be a wise option, saving us on tax, uncertainty while helping in employee retention.
References:
1. Geddes, Ross. IPO and Equity Offering. Accessed on 4-8-09.Available at
books.google.co.in/books?isbn=0750655380...
2. Sify Business, Accessed on 4-8-09.Available at http://sify.com/finance/fullstory.php?id=14605395 Read More
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