Expensive, cannot be collateralized, hard to predict returns It is a problem because protecting intellectual property is easier when they are privately held- the result is more equity financingBonds are a source of debt financing and is public because of this I would consider the bond market not to be a good alternative. oLong term aid that can be private or publicoNo, because cash flow problem- could securitize, could go in to convertible bonds (equity side)Bank loans are not a good alternative. Intangible assets are hard to re-sell so it would not make senseto get a loan which would make getting a loan costlier to the business4. Why might equity financing make more sense? What sort of equity financing? Private equity financing would make the most sense- it’s easier to protect intangible assets like intellectual property when they are privately held Because you will not be able to resell intangible assets it makes sense to finance them with equity instead of debt. If you finance with debt you will eventually have to payback this loan which you’ll do out of profits instead of giving these back to the share holders Don’t need to be super predictable and you’ll have controlAlso could finance with internal revenueD. Read “A (going) private matter” (Item 15.11), “Where Have All the Public Companies Gone?” (Item 15.12), and “Stock Picking Is Dying Because There Are No More Stocks to Pick” (Item 15.8), and answer the followingquestions:1. What are the benefits to a company of being listed? What are the costs?
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Information value (good to see performance of managers) Ownership is more liquid (easier to exit and diversify)Makes M&As easierCan link comparison to performance of stock It is easier to finance capital when a company is publicCan make a ton of money with an IPOIt is easier to expand as a public company because it is easier to obtain capitalCapital raised can pay expenses or debt Costs:oAnnual listing fees and compliance costs- expensesoCost of equity- paying shareholdersomust keep added disclosure with investorsoComply with SEC rules and regulationsoPressure of the market- will focus on short term results instead of long oGetting audited is expensiveoPossibility of getting orphaned (stock prices drop and no one will buy) 2. How has the number of public companies decreased (mechanism)? Through M&Asobig companies are buying small companies and keeping them as private companiesthe benefits to going public are not as obvious as they were in the past, because private companies have an unprecedented ability to raise capital to finance investment often of equal or better terms than the public marketfirms are exiting and less firms are coming in 3. Why has being public become less attractive? Because the regulations and costs have increased in the wake of scandals, such as Enron. Companies are facing high public equity costs and a decrease in their valuation (how much their shares trade for)Private equity is more attractiveCosts are more burdensome because small companies are the ones that typically are converting to gopublic4. What has been the effect on investment management?
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