Question

Chapman Co. is a privately owned MNC in the U.S. that plans to engage in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the present time, world stock market conditions are very weak but are expected to improve. The U.S. market tends to be weak in periods when the other stock markets around the world are weak. A financial manager of Chapman Co. recommends that it wait until the world stock markets recover before it issues stock. Another manager believes that Chapman Co. could issue its stock now even if the price would be low, since its stock price should rise later once world stock markets recover. Who is correct? Explain.

Answer 1

Financial manager of Chapman company is correct. This is because if the IPO is issued now it will be issued at a very low price. The company will not be able to raise much funds. At the same time the valuation of the company will decline.

Hence the initial public offer should be issued at a time when the world stock markets recover since that will improve the pricing of the stock as well as the valuation of the company in the international market as well.