- What is the economic advantage of a trade secret? Please explain why.
A trade secret is any practice or process carried out in the company, and it is generally not known outside of the company. However, a trade secret economic advantage is considered as the information given by a trade secret over its competitors. It’s usually a product of internal research and development. Therefore, before considering it as a trade secret, a company must make a reasonable effort in concealing the information from the public since the secret has to intrinsically have economic value, and it must contain information. As I tie a knot, trade secrets are a part of a company’s intellectual property. Unlike a patent, a trade secret is not publicly known.
- Of the three valuation methods for an intangible asset discussed in the chapter, which one would you use and why?
Intangible assets are long-lived assets used in the production of goods and services. Besides, intangible assets lack physical properties and represent legal rights or competitive merits which are developed or acquired by an owner. With the aim of having value, intangible assets should generate some measurable amount of economic benefit to the owner, such as incremental revenues or earnings, cost savings, and increased market share or visibility.
However, the three methods used to value intangible assets are; market, income, and cost approaches. In my defense, I prefer a cost approach to market and income because it uses the cost information to value an intangible asset. Besides, it is more useful in situations where there is no active market for intangibles or intangibles that are unique. For instance, the approach can be applied to brand valuation.
- Regarding Stock price, explain how it is set at the time of company formation. Describe the key factors that influence stock price before the IPO.
At the time of the formation of the company, an investment bank evaluates the present and future performance of the company and the health of the company to determine the value of the share to be sold in the IPO. These can be done by comparing the company with the IPO of another company and then determining the NPV of the firm. Therefore, after a serious discussion between the investors and the company, a final share price is set.
On the other hand, some of the key factors which influence stock price before the IPO is; demand and supply, which affects the price of shares. For example, when the demand for shares exceeds supply, the price increases, but when supply exceeds demand, the prices decrease. The next one is the structure of the organization and its leadership. According to me, I think this is all about management. Therefore, the profile of management has a significant effect on company success and stock prices. For instance, having experienced professionals with a proven track record, share prices are likely to be higher, and if it lacks integrity, the share prices will automatically fall.
- Regarding stock price, explain what dominates stock price after IPO.
After an IPO, the company profit will not increase in the share price because companies that put its stock up for sale through an IPO will not benefit from a rising share price on shares they’ve already sold to the market. For more clarification, keep in mind that the stock market is actually comprised of two markets, namely, primary and secondary markets.
In the first case, a company issues shares to investors who remit capital to the company for the shares. It is only at this time that the company receives capital for its shares. Once the shares are over at the specified offering price, the company receives their cash. Contrariwise, in the secondary market, investors who originally bought the issue in the primary market sell their shares to other investors, who, in turn, hold their shares and eventually sell them to other investors as well. As I wind up, it is still advantageous for a public company to have a high share price because it increases the company’s market capitalization, and hence its ability to issue more equity shares at relatively high offering prices.
- How are the changes in the market price of a stock reflected in the Balance Sheet?
Changes in the market price of a stock will be reflected in the balance sheet in the following ways. For instance, if it’s the price of a company’s own stock, the effect on its balance sheet will be limited to the valuation of certain accounts like liabilities-classified stock options and derivative fair values, and certain tax accounts related to stock options and other derivatives. Besides, the stock prices of other entities can affect the balance sheet if they are investments owned by the company or certain types of unconsolidated subsidiaries. Lastly, the overall level of the stock market might affect certain reserve accounts or fair market value estimates, although these are almost always based on long-term statistics that would not be affected much by recent ups and downs.