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FM Written Assignment#6

Case Study: Dottie's Grocery IPO

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14 views

FM Written Assignment#6

Case Study: Dottie's Grocery IPO

Uploaded by

imbukahmesh
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case Study: Dottie’s Grocery

Process of Public Offering

A public offering which is usually undertaken as an initial public offering follows the following

chronological steps as covered in discussion forum #6. The process commences with a

company’s decision to go public subject to the board’s approval and advisory team

recommendation (Jessica, 2023). The company then appoints underwriters to help them during

the public offering. The next phase entails a series of preparation events including but not limited

to due diligence of the company, and the preparation of the registration statement as a

requirement of the US Securities and Exchange Commission (SEC). The company is then

required to file the registration statement with the SEC for review and request revisions or

additional information where necessary. The company would then be required to embark on

marketing the public offering to potential investors through road shows and other marketing

means. The company will then use the feedback from the roadshows to set the public offering

price for the number of securities to be issued (Jessica, 2023). The company then files the offer

pricing and offering details to the SEC before proceeding with the public offering.

Impact and Implications of each alternative

Issuing common stock will help Dottie's Grocery raise funds to maintain and expand its

operations. Instead of adding more debt to their balance sheet, which is a financial statement,

and budgeting for the servicing of debt, a company can take a less expensive route and issue

common stock (Jonick, 2017). Common stock will help attract more investors for the company

and even improve Dottie's Grocery's credit rating.


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However, the issuance of new common stock will lead to the dilution of ownership of Dottie’s

Grocery. Consequently, issuing new common stock to raise capital will reduce existing

shareholder’s ownership stake and voting influence diminishes. Going public through the

issuance of common stock means that the company must comply with the filing regulation

applicable to publicly listed companies (Coleman, et al., 2016). For instance, Dottie's Grocery

will need to disclose its financial statements to the public as these provide a snapshot of the

company's financial health, giving insight into its performance, operations, and cash flow.

Alternatively, the company can raise capital by issuing debt to the public. Unlike common stock

financing, debt financing does not dilute the ownership of the issuer company. The debt

financing will include "principal, which must be repaid to lenders or bondholders, and interest.

However, the company must note that the interest expense which is the cost of capital is a

mandatory expenditure that reduces the net income and cash flows of the issuer company. The

company must ensure that it maintains a favorable debt-to-equity ratio which minimizes the

overall cost of capital and financial risk but maximizes return. Coleman, et al., (2016) state that

an increase in debt will effectively influence debt-to-equity and debt-to-total capital to rise. Debt

financing will affect the liquidation procedure of Dottie's Grocery with the payment of

debtholders taking priority over equity holders.

Guarding Finances and Affairs in a Family Business vs. Public Company

Currently, Dottie’s Grocery company affairs and finances are guarded and shared among the 7

shareholders. However, this is set to change with a public offering. To enhance transparency

about the company's financials, Dottie's Grocery must henceforth publish its financial statements

and other key financial metrics for public scrutiny. Furthermore, the company will be required to
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comply with SEC regulations and regular audits. In terms of financial reporting, the company

must comply with GAAP or IFRS standards and submit regular filings (10-Qs, 10-Ks) and also

ensure Sarbanes-Oxley (SOX) Act compliance (Carney, 2006).

Going public will also impact the company's debts and earnings. For instance, issuing more debt

will increase interest expense thus reducing the company's earnings and return to investors.

Furthermore, the issuance of debt capital could impact the capital ratings of the company thus

likely increasing borrowing costs. Lastly, new stakeholders will significantly influence the

management of the company. For example, the new shareholders could drive changes in the

governance practices of the company and also changes in the board of management.
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References

Carney, W. J. (2006). The costs of being public after Sarbanes-Oxley: The irony of going

private. Emory LJ, 55, 141.

Coleman, S., Cotei, C., & Farhat, J. (2016). The debt-equity financing decisions of US startup

firms. Journal of Economics and Finance, 40, 105-126.

Jessica, E. (2023, April 28). Understanding the IPO Process and How It Works. Retrieved from

U.S Chamber of Commerce: https://www.uschamber.com/co/start/strategy/guide-to-the-

ipo-process

Jonick, C. (2017). Principles of financial accounting. Georgia: University of North Georgia

Press Dahlonega.

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