Reference no: EM132292009

Assessment - Case Analysis

Learning Outcomes

b) Analyse financial information and evaluate financial performance of a business.

c) Apply time value of money to the valuation of a variety of cash flows, securities and projects leading to sound investment and financing decisions.

d) Analyse risk and return associated with investments.

e) Apply various capital budgeting techniques to investment decision making.

f) Analyse the cost of capital and explore its link to the capital structure of an organisation.

g) Analyse working capital and payout policies and their impact on the liquidity position of a business.

Context:

The Case Analysis assesses students' understanding of capital raising by Australian companies through an initial public offering (IPO) and its impact on firm's performance. The focus is on the four puzzles identified in academic literature concerning IPOs:

Instructions:

1) Costs of IPOs are very high.
2) On average, IPOs appear to be underpriced.
3) The number of IPOs are cyclical.
4) The medium to long run performance of a new public company (3 - 5 years from the date of issue) is poor.

(a) You are required to identify any three Initial Public Offerings (IPOs) on the Australian Securities Exchange (ASX) of an amount of at least $100m that occurred during the 8-year period from 2007 to 2013. They should be from different industries. Using information from annual reports and other sources such as analysts' reports, evaluate whether the funds raised from the IPO were used to finance viable investment projects. If some of the funds raised contributed to working capital needs, you should highlight that.

(b) Using academic literature and evidence from Australian IPOs in general and the three IPOs chosen in (a) above, critically evaluate the statement: "IPOs are a costly way of raising long term finance for corporations". In your answer you should discuss how the equity raised from the IPO changed the cost of equity of the firms.

(c) With reference to your selected IPOs, empirically verify the extent of underpricing by comparing issue prices and closing share prices at the end of the first day of trading on the ASX. Provide a well-reasoned argument on whether the extent of underpricing is different from industry to industry.

(d) Empirical evidence has stated that the level of IPO activity in any economy is cyclical and is a function of market conditions. By analysing IPO activity on the ASX for the period beginning 2007 and ending 2017, explain if any, the pattern of IPO activity during that period. Provide reasons for any changes in IPO activity over the period, relate this to Australia's economic growth pattern.

(e) Companies use IPOs for different reasons such as converting a private company to a public company, spinning off a business of an existing listed company or privatization of a public company. Despite these different objectives, the underlying motivation would be to increase shareholder value. It has however been argued that IPOs seem not to add value given that on average the share price performance of companies in 3-5 years after the IPOs is poor. Evaluate the argument using data gathered about your chosen organisations. Critically evaluate and comment on their shares performance.

(f) Does your conclusion in (e) change when you consider as additional return the dividend yield shareholders may have received during the same period.

In addition to the above you will also be assessed on the following: (see Learning Rubric at the end for more description of expectation).
(g) Content, Audience and Purpose

(h) Critical reasoning, presentation and defence of an argument and/or position

(i) Analysis and Application with synthesis of new knowledge

(j) Use of academic conventions and sources of evidence

(k) Effective communication