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The assignment is based on four documents
- A case study 'The Facebook IPO hype: a rude social awakening' ∙ Facebook IPO prospectus
- An Excel file containing daily share price of Facebook since its IPO (FB shareprice)
- Facebook's Annual Report 2016
Read the case study and the relevant parts of the Facebook IPO prospectus and annual report to answer the following questions
a) Initial Public Offer is one of the many options that are available to a company for raising capital. It involves the process of selling company stock to the public, post which the company becomes a publicly traded company.
Advantages of IPO
- A company can raise a large amount of capital rapidly by reaching out to a large number of investors.
- A company gets popularity by getting listed on stock exchange which can create new business opportunities for it.
- Being a listed company is a matter of repute and companies tend to add to their goodwill via IPOs.
Drawbacks of IPO
- It is a time-consuming and cumbersome process and could take somewhere between six to nine months.
- The other working areas of the company can get neglected since this process takes a lot of focus of the management.
- There are many costs involved in the process such as underwriting fees, filing fees, etc.
- There is excessive pressure from the shareholders to perform well due to which the company might make poor decisions.
b) The main reason for Facebook going public was the Securities and Exchange Commission rule of 1964 as per which any private company with more than 500 shareholders was required to comply with the same financial disclosure requirements as that of a public company. Besides this, the company would have major expansion opportunities with the amount of capital that would be raised with initial public offering. Besides, the reputation and the goodwill of a listed company were likely to make Facebook an even more powerful company (Sloan, 2012).
Even though Facebook had multiple avenues to raise capital, it chose the option of initial public offering. The reasons for choosing equity over debt are as follows:
- IPO's offer a company with a quicker and easier collection of capital as compared to debt.
- The amount of statutory compliances to be made at the time of raising debt capital are more than that of equity capital.
- Raising equity capital is comparatively easy and less risky as debt capital requires mandatory payment of interest and can turn out to be an expensive option even after getting deduction on taxes.
The IPO was indeed the most suitable choice since Facebook had crossed the statutory limit of having 500 investors to remain a private company, under the regulations of Securities and Exchange Commission. Also, the option of IPO offered the company with huge capital and increased goodwill.