Security Stock and Exchange (SEC)
Supporters of companies going public suggest that gaining additional capital is one of the benefits medium sized companies gain by going public - Security Stock and Exchange (SEC) introduction. The rationale for going public is to float the shares of the company through the stock market by starting an initial public offer (IPO) inviting the public to purchase its shares and raise additional capital. Once the company has met all of the requirements for filing Security Stock and Exchange (SEC) they are in compliance with SOX.
Under SOX section 404, requires all CEO and CFO to certify and report to the public the effectiveness of internal control over the financial statements. Secondly, corporate social responsibility (CSR) is another benefit accrued by a medium sized company by going public through publication of it information. Aside from profitability, corporate social responsibility aids company to position ineffective market-based solutions to social. By CSR redirect negative problems caused by corporate operations onto the consumer and protecting their interests while hampering efforts to find just and sustainable solutions.
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The rationale of publishing company information is to give the company a platform to state its willingness to take into consideration the stakes of all stakeholders involved in its financing and operations. This increases public confidence in the company. Going public also benefits a medium sized company by increasing its competitive advantage in the global market. Going public is a strategic objective by some medium sized companies to become competitively aligned. Finally, gain competitive advantage all through expanded capital base and improved public confidence.
Create an argument that the same goals may be achieved if the company remains a privately held entity. Provide support for your answers The opponents of public listing held that a company can acquire the benefits of going public while still being private and more efficient. For instance, Leuz (2007) asserts that a company can gain additional capital through borrowing loans from banks as opposed to going public. Corporate social responsibility can also be obtained even for privately owned companies that actively engage in community advancement programs.
In this way, the company meets the requirements of its stakeholders without exposing itself to public scrutiny and retains its ability to maintain a competitive advantage through internal strengths and enhanced customer relationship management (Dolvin & Pyles, 2007). The opponents of going public also hold that a corporation can devise ways of being strategically aligned while retaining its private status. For instance, a private company can make objectives that are strategically aligned to its vision and mission and narrow its market niche to serve the needs of its customers.
This can be achieved through strategies such as being the least cost provider for commodities or emphasizing unique customer experience through the provision of quality products. This disqualifies the perception that a company can only gain competitive advantage by going public (Li, Morton & Sonja, 2008). When a company decides to go public, it can typically obtain capital by issuing stocks or bonds. Suggest four (4) leading financial rations that will be evaluated and how each will impact the company’s decision to obtain expansion funds. Determine whether the results of the ratios would alter the decision to go public.
Financial analysis serves as both a control and planning tool. Aids in making important company decisions obtain expansion funds and also on the decision to go public or remain private. Liquidity ratio illustrates the ability of a company to pay its accrued debt in the short term. A company with high liquidity ratios is not advised to obtain expansion funds through debt since it cannot pay up the already accrued debt. It would be advisable for such a company to generate expansion funds by going public since this increases the equity ratio and reduces the debt and liquidity ratios (Alrafadi, & Md-Yusuf, 2011).
Activity ratio assesses the ability of the company to convert its assets to cash. When activity ratio is high, the company should go public since it already has liquid cash and needs to save up more of its finances through the floating of shares compared to borrowing cash. Profitability ratios assess the measures that organizations will use in making money. It mainly assesses the profitability of a company against the earnings ratio, and when this ratio is low, the company needs to remain private then go public since its profitability will not attract any investors (Alrafadi, & Md-Yusuf, 2011).
Debt ratio is aimed at assessing what amount of the company capital structure constitutes debt capital. Where the company has a lower debt ratio, it means that it has more of equity than debt, which is a good state in a company. In this case, the company can borrow debt capital or go public to gain more funds as it has a strong debt ratio. That it is essential to analyze the financial ratios of a company prior to deciding, whether to obtain more funds by going public (Alrafadi, & Md-Yusuf, 2011).
By researching, the results of SOX compliance surveys assess the financial impact that SOX might have on your company if it decides to go public. Considering the impact SOX compliance, take a position as to whether your company can overcome the challenges posed by identifying the potential advantages and disadvantages that SOX may have on your company. SOX is a legal framework developed by the United States with the aim of increasing the accountability and transparency of listed companies, especially pertaining to the cost of going public.
Transparency is one of the advantages gained by a medium sized company that uses SOX to go public. Structures put in place through SOX monitor the internal systems of the company, prevent failure, ensure accurate disclosures and improves the management of risk of the company. This enhances the transparency of the medium sized company and increases its credibility among the public and potential shareholders (Kaserer, Mettler & Obernberger, 2011). Going public with SOX also enhances the reliability of medium sized companies.
The consumers and members of the public are able to predict the company’s behavior since the company publishes its accounts. Through transparency and improved public scrutiny, shareholders and other stakeholders such as customers are able to view the profit of the company, the prospectus and evaluate the ability of the company to meet their expectations in the future. The consumers can through public scrutiny develop confidence on the medium sized company going public via SOX, which increases customer base and profitability of the company (Litvak, 2007).
Additionally, a medium sized company benefits from going public through SOX by enhancing investor confidence in the ability of the company to offer viable returns to investors’ investment. For example, an investor will be more confident in investing in a company that publishes its financial statements as a requirement of going public. This is because the investor will be able to view the profits of the company and its ability of the provide high returns on the investors capital. This benefits the company through investor loyalty and attracts more potential investors (Li, Morton & Sonja, 2008).
Cost is one of the major negative impacts of SOX if a company goes public. For example, a company has to incur underwriting cost, which is a, direct cost for a company going public. The company going public under SOX also incurs indirect costs like under-pricing of its shares in the stock exchange (Wintoki, 2007). The Company also incurs legal cost since lawyers are needed to advise the company on legal consequences of going public. In most instances, the cost of a company going public through SOX outweighs the benefit of going public and may have adverse effects on the company Leuz, 2007).
Lack of secrecy is another adverse effect of a company going public through SOX. For example, a company that discloses its financial records risks sharing its strategic plans with its competitors, which robs the company the ability to remain competitive since its strategies and secrets are available for public scrutiny (Litvak, 2007). Moreover, involvement of external auditors is another adverse effect of SOX going public to medium sized companies. Example; prior to being private where a company would have just an internal auditor, a company that goes public also needs an external auditor to verify the internal systems of the Company.
This further exemplifies the operations and the auditing costs of the company by going public as a report of the external auditor are more reputable compared to that of an internal auditor (Grifin & Lont, 2005). Make recommendation as the CEO regarding the alternative (i. e. , going public or staying private) that will best support the company’s expansion goals. As the Chief Executive Officer of a medium sized company, I recommend that the medium sized company should go public as this will support the company’s expansion goals.
This is affirmed by the fact that going public fits into the strategic objectives of the company by being strategically aligned to gain competitive advantage. Although there are costs incurred during going public if the team is committed to the process and there are available resources to go public; economic feasibility evidences that the benefit of going public outweighs the risk and viable venture for any medium sized company. Moreover, though SOX has been challenged, the benefit that accrues to a medium sized company by going public affirms the rationale for a company to go public.