How does being publically traded help a company? I would like a mathematical answer.?

Question

I own a company, it is entirely funded by my own money. How does making my company publically traded help me/hurt me? Please explain this using math.

Thanks

thank you very much fathead, that was exactly what i was looking for.

Can you tell me however, beyond my IPO price, am I going to be able to make any money from my company? No right, unless the stock goes up and then I offer some of my other 500,000 shares for sale, right?

Thanks so much for your help

Answer 1

It isn't entirely a mathematical question.

There are several reasons to go public. One is to raise more funds for your company. Selling public equity is not the only way to do this, though -- you can borrow money (not a great idea for growth firms) or you can sell private equity. If you sell private equity, the buyers will usually want an exit strategy. That either means selling the firm, selling off part of the firm or going public.

The other reason for going public is to become more liquid. You undoubtedly have a lot of your worth tied up in your company. Going public would allow you to sell some shares and get cash. It would also allow you to diversify.

OK -- here is some math.

Let's suppose that your firm has an expected return equal to the expected return of the stock market as a whole. Let's suppose that the volatility of returns of your company is about 70% and that the market has a volatility of 20%. Let's suppose that the correlation of returns between your returns and the market is 0.5.

If you keep all of your money in your company, you get the market return for 3.5 times the volatility. If you sell half your shares & invest in the market, you keep control of your company, but you lower your risk exposure.

With half your money in the market & half your money in the firm, your expected return would not change -- but your volatility would be:

volatility = sqrt(w1^2*v1^2 + 2*w1*w2*cov(1,2) + w2^2*v2^2)

where

w1 = weight in your firm = 0.5
w2 = weight in market = 0.5
v1 = volatility of your firm = 0.7
v2 = volatility of market = 0.2
cov(1,2) = covariance of returns of the market and your firm.
This is equal to correllation time volatility of market times volatility of firm = 0.5*0.7*0.2

This means that the volatility of your holdings would be:

40.9% -- so you would be able to cut the risk of your net worth almost in half.

That mathematical enough for you? -- because I can do more.

Answer 2

The reason a company decides to "go public" is so that it can raise capital. They then invest the capital into the business, the business grows, and everybody wins. Let's say you've got a chain of profitable restaurants around your city. You go public, raise cash, and go national, potentially multiplying your profits many times. When a company goes public, the owners may decide to retain a controlling percentage of the stock, otherwise they may be forced out. Whoever owns a majority of the shares owns and controls the company. sorry I don't have any math for you!

Answer 3

Mathematical answer? OK, how about:

Initial offering price * # shares sold - offering costs = funds raised

Is that mathematical enough for you?

Selling equity in a company is diluting ownership. Let's say your company has authorized 1,000,000 shares of stock and you offer 500,000 shares for sale in an IPO. Assuming it is fully subscribed, you've sold 1/2 of your company, in effect.

Answer 4

If going public is actually intended to capitalize the company, instead of pre-public shareholder's wallets', a much greater amount of money can be raised than going to private funding sources.