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Chapter 17: Q.17 (page 426)

What is the difference between a private company and a public company?

Short Answer

Expert verified

The major distinction between public and private corporations is that public companies can sell their shares to other public companies, but private companies cannot.

Step by step solution

01

Step1. Definition

They can sell their stock to the broader public if they are a publicly traded corporation.

They can sell their own privately owned shares to a few eager investors if they are a private corporation.

02

Diffference

Basis of comparisonPrivate CompanyPublic Company
MeaningPrivate Limited
A company not listed on a stock exchange and whose shares are held privately by the members concerned.
Public Limited
A company listed on a recognized stock exchange and whose shares are traded openly by the public.
Minimum number of members27
Maximum number of members200, except in case of one person companyunlimited
Minimum number of directors
23
Article Of AssociationIt is a must necessity to frame its own AOA.
It is not a necessity to frame its own AOA..
Public Subscription
issue of shares or debentures to the public is not allowed.
Itcan invite the public to subscribe to its shares or debentures
ExemptionsEnjoys many privileges and exemptions.
No such privileges and exemptions
Transfer of sharesThe shares are not freely transferable.These company's are freely transferable

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Most popular questions from this chapter

Explain why a financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits.

You and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at the end of the year.

Calculate the equity each of these people has in his or her home:

a. Fred just bought a house for \(200,000 by putting 10% as a down payment and borrowing the rest from the bank.

b. Freda bought a house for \)150,000 in cash, but if she were to sell it now, it would sell for \(250,000.

c. Frank bought a house for \)100,000. He put 20% down and borrowed the rest from the bank. However, the value of the house has now increased to \(160,000 and he has paid off \)20,000 of the bank loan.

How much money do you have to put into a bank account that pays 10% interest compounded annually to have $10,000 in ten years?

Answer these three questions about early-stage corporate finance:

(a) Why do very small companies tend to raise money from private investors instead of through an IPO?

(b) Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?

(c) Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?
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