Creating the First Public Law Firm: The IPO of Slater & Gordon Limited Case Study Solution
Prior to research, law permits outside share in practices of law which is particularly seen as a way for consolidation and to make deliverance of legal services more efficient for individuals. This include individuals who have traditionally been served by small law offices at high street.(Jr, 2008)
Considering each segment of service of either one or a number of vendors for standardization provides with increased leverage over preventable expenses, additional economies of scale and raising transparency into what the organization needs to pay for. Through reduction in the number of business facilities, money can potentially be saved and operations can be performed in more efficient manner. Therefore, Consolidation is the way of bringing improvement in communication amongst the functions of business like production and marketing and achieve funds through decrease in head count and process and system consolidation.
Changes in legislation limits individual rights in order to recover personal injuries compensation which had amplified complexity of impeaching cases of personal injury and make it more complicated for firms operating at small scale for handling of these kind of cases in an efficient manner. Just because Slater and Gods on had the ability in operating systems and processes which were required for litigation of cases i.e. more complex. Hence, S&G could create value through integration in small ventures into a well-developed network at national level with possibly low risk and cost.(Chris Aulich, 2011)
Valuation of Slater and Gordon S&G
Assessment of the worth of Slater and Gordon S&G, the enterprise value is 113000000, also the weighted average cost of capital of the company is 8% which is derived by using the debt and equity portion in the capital structure, the debt portion in capital structure is 0.04% while the equity portion in the capital structure is 0.95%, the net debt outstanding is 5400000 while the cost of equity is 107600000, resulted in 8% weighted average cost of capital (WACC).
On the other hand, the price of each share is calculated by dividing total enterprise value by the number of outstanding shares which is resulted in $1.04 / share which shows that the company offers share at $1.00 which is lower than $1.04 it is due to the fact that the company wants to gather more investors who would purchase maximum number of shares. Additionally, the sensitivity analysis is being performed with respect to predict the net present value of the company with different or certain range of variables which includes terminal growth rate and weighted average cost of capital (WACC). The terminal growth rate is provided in case which is 10%, the terminal growth rate is used which are lower than weighted average cost of capital ranging from 2.5 percent to 5.0 percent. Whereas the weighted average cost of capital is calculated to be 8% and the ranges for WACC are used to calculate the Net present value ranging from 6 percent to 10 percent resulting in varieties of highest or lowest net present value.
Possible issues with law firms in going public:
Governance and public policies are the primary developmental movers in in different economic sectors and the society individualities. The track of governance and public policy prepares individuals to meet the demands of legitimate and effective action of public in complex and are frequently controversial political settings. Generally, law firms are managed and organized in the structure of partnership and every partner has a view on all foremost decision making process. Thus, there are some regulatory problems in operating a law organization as well as multinational firms possibly have sub partners within the main partnership area making it problematic for the organization to operate with IPO in each country.
There are many law organizations that are forbidden from going public in terms of jurisdiction. Yet,many law organizations can only be retained by lawyers creating public ownership difficult. Organizations would not want to be traded publicly law companies are not businesses i.e. capital intensive and thus, do want money specifically. Public organization is expected to be less worthy due to the fact that all the law companies have the ability to generate enough profit which is primarily tied up with their partners. But these partners have the right to move to other organizations as per their convenience.
For instance, when Google went public, there were issues IPOs, it has issued class B shares having no voting rights in order to make sure that the executives and founders still had control of the corporation. In addition to this, the company has wisely dealt with cost associated with issuing IPO to go public. As such, the interview has published in the playboy magazine, this in turn have violated the SEC rules tends to restrict the comments which might be made regarding Google in a lead up to an IPO.
Investment in IPO:
The analysis of the financial stability of S&G to provide Rosen with guidance if she should invest in shares of S&G or not. Analysis on current financial state demonstrated ability of S&G to show potential growth in future. Therefore, for estimation of its NPV – Net Present Value on the basis of sensitivity analysis with varied terminal growth rate and weighted average capital cost was conducted. The evaluation with variable terminal growth rate from 2.5 percent to 5.0 percent with difference of 0.5 percent in each and weighted average capital cost from 9 percent to 13 percent with difference of 1 percent showed significant increase in revenues.
Continuous increase in organizational profit in forthcoming future demonstrated that the value of NPV is thought to be positive even with variation in terminal growth rate and weighted average capital cost. Therefore, it is predicted that there will surely be continuous increase in the growth of organization. Hence, it is to suggest that Rosen should invest in the shares of S&G as potentially there are no chances of loss rather it will surely generate profit.
Optimal capital structure
The optimal capital structure of the company is best mix of equity, debt and the common stock tend to maximize the market value of the company while minimizing cost of capital. In addition, the optimal capital structure of the company is being calculated in terms of proportion of equity and debt. The calculations shows that the proportion of the debt as well as equity in the capital structure should be 90 percent equity and 10 percent debt it is due to the fact that the weighted average cost of capital resulted in 8.1 percent on which the net present value of the investment in initial public offerings (IPOs) is more as compared to net present value calculated on different weighted average cost of capital (WACC) i.e. 36 percent, 33.1 percent, 29.9 percent, 26.8 percent, 23.7 percent, 20.6 percent, 17.5 percent, 14.3 percent, 11.2 percent and 8.1 percent…………
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