Lesson 1 An Overview of Small Business Economics

DISCUSSION QUESTION 1-2

MB609 Capstone: Case and Industry Analysis

Lesson 1: An Overview of Small Business Economics

Discussion Question 2

Having successfully brought a new product to market, you are now ready to take your company public. Discuss how each of the following economic indicators may affect the environment for the launching of your initial public offering (IPO). Overall, how soon should you launch a public offering given the cyclic nature of the economy?

Nominal Gross Domestic Product (NGDP): The nominal gross domestic product is increasing at the rate of 2.6% annually, while the Real Gross National Product (RGNP) is rising only 2.3%.

Consumer Price Index (CPI): The Consumer Price Index has been rising at a fraction of a percent per quarter for each of the last four (4) quarters.

Discount Rate: The Federal Reserve has announced a reduction in the discount rate of 0.5% and hinted that further cuts may be forthcoming.

Unemployment Rate: The rate of unemployment is holding steady, although the rate of new claims is declining somewhat.

The following economic indicators affects the environment launching the company’s IPO. They includes.

Nominal Gross Domestic Product (NGDP):

The nominal gross domestic product (NGDP) has a positive impacts on the success of the new IPO. From the fact, it is clear that the nominal gross domestic product is growing at a higher rate by 0.3% than the real gross national product. The difference indicates that the economy has a potential expansion and thus, the launch of the IPO will likely succeed (Li & Shi, 2016). It is important to understand the favorable gross domestic product which supports the successful launch of the IPO.

Consumer Price Index (CPI): 

The rising the consumer price index in the last four quarters implies the rising inflation rates in the economy. The rising inflation rates has a negative influence on the launch of the new IPO for the company. The high level of inflation rates implies that company might not make adequate profits due the inability to pass the high prices of products to the consumers. The rising consumer price index might raise skepticism on the success of the IPO. Thus, the company should wait for the consumer price index to start declining.

Discount Rate: 

The discount rate set by the Federal Reserve affects the amount of interest rates in the economy. The announced of a reduction in the discount rate of 0.5% and hints of further cuts would have a negative impacts on the launching of the company’s IPO successfully. The investors will have a negative view that the stocks will be overvalued and it creates a situation of stalling for the investors to wait for market correction. The IPO may not trade accordingly due to the investor pemmissim about the valuation of the IPO stocks.

Unemployment Rate: 

The rate of unemployment also affects the success of IPO stock of the company. The stability of the unemployment would make it difficult for many individual investors to purchase the stocks in the markets. However, the new claims that the rate of unemployment is somewhat declining will create a suitable environment for the success of the IPO. The investors relies on the market claims and perceptions, which leads to significant impacts on the stocks. Therefore, the new claims of reducing rate of unemployment are likely to improve the level of unemployment.

Given the cyclic nature of the economy, the company should wait for some period before launching the IPO. The current economic indicators are not favorable for the launching of an IPO of the new product in the market (Peterle & Berk, 2016). For example, the high CPI raises the inflation rates, which limits the success of the IPO. However, the claims of the declining unemployment rate and the nominal GDP offers some hope for the potential success of launching an IPO. Therefore, it is critical for the company to remain still and observe the economic indicators before launching the IPO.

References

Li, X., & Shi, X. (2016). The impact of IPO on the secondary stock market—An empirical research. Modern Economy, 7(03), 299.

Peterle, P., & Berk, A. S. (2016). IPO cycles in Central and Eastern Europe: What factors drive these cycles?. Finance a Uver, 66(2), 113.