Evaluating the Fund Raising through an IPO on ASX

This report evaluates the process of capital raising through an IPO on ASX and assesses the performance of cyclical stocks in the economy. It also discusses the cost effectiveness of an IPO for long term finance and factors related to underpricing of shares. The report concludes with an examination of the impact of the economy on cyclical stocks and the objectives of issuing an IPO.

Running head: EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Evaluating the Fung Raising through an IPO
Name of Student:
Name of the University:
Author Note

1
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Executive summary
The aim of this report is to understand the process of capital raising by an Australian
companies through the issue of IPO and evaluate whether those fund has been utilized for the
purpose of the for which they have been raised. The report also discusses the objective of an
IPO, like conversion of private capital to the public and vice versa. The report also assessed
the performance of cyclical stock in the economy, i.e. how they can be useful in balancing the
performance of the portfolio in the period of recession and in the economic growth. At the
end of the report a concluding remarks has been added on the performance of the share price
issued through an IPO in a long and short run.

2
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Table of Contents
Introduction................................................................................................................................3
Answer to part (A).....................................................................................................................3
Answer to part (B)......................................................................................................................6
Answer to part (C)......................................................................................................................8
Answer to part (D).....................................................................................................................9
Answer to part (E)....................................................................................................................11
Answer to part (F)....................................................................................................................14
Conclusion................................................................................................................................15
References................................................................................................................................16

3
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Introduction
The purpose of this report is to understand the funding of the capital through an IPO
on the ASX. For this purpose, three public company has been taken like virtus health, GDI
property, carsales.com has been taken to evaluate their performance before and after the IPO.
It is also evaluated that whether the funds which has been raised to do the project, have been
utilized for the same purpose. Further it is also examined whether the IPO are costly way of
raising the long term finance for the corporation.
For this purpose the cost of equity has been calculated using CAPM approach and it
is compared with interest of long term debt, to evaluate the cost effectiveness. The report
further discusses the effect of the cyclical stock in managing the portfolio in the period of
recession and the economic boom. At the end of the report, different objectives of an IPO are
examined like conversion of private to public company and many others.
Answer to part (A)
Identification of Company Listed on the ASX with an IPO for an Amount of more than $ 100
Million.
Virtus Health
This company is related to the Health care sector, the business of the company is to
provide assisted reproductive services in Australia and Ireland, the corporation is expanding
is business presence in UK, Denmark and Singapore. The company has come up with an IPO
of 346.5 million USD in the year 2013 in the month of June. However the company can only
raise 310 million USD (Bewley, 2013).

4
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
The purpose of the Raising the fund is to supplement its business operation of assisted
reproduction technique. The company has utilized the fund amount in expanding its foot print
at the global level. The company is providing the quality services by establishing fertility
clinics, Day hospital and diagnostic center across the country (Brusov, Filatova, & Orekhova,
2013).
Some of the major acquisition made by the company in the following years are given below
 Acquisition of Aagaard Fertility Clinic, Aarhus Denmark on 1st Dec 2016.
 Acquisition of Canberra fertility center as on 20 may 2016.
 Acquisition of the second Irish fertility clinic 24 December 2016 for 6 million Euro.
 Acquisition of majority stake in Irish IVF provider for 15.49 million Euro as on 30
may 2014 (Carey,Fang & Zhang, 2016).
GDI Property
The Second Chosen Company is GDI Property which is property and fund
management group, the company has issued its IPO in the year December 2013, the company
raises an amount of USD 287 million. The company raised such amount to support its real
estate project like leasing and Syndication of office and commercial properties (Chatalova,
How, & Verhoeven, 2016).
Carsales.com

5
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
The next company which got selected is from the automobiles sector named
carssales.com. The company is Australia largest platform of the sale and buying of used car,
automobiles. This is Australia one of the leading website for the advertisement of the used
automobiles.
The company performance has shown a tremendous growth 17 % in the reported
revenue of $235 million, the company has increased its international exposure in the foreign
market, strong reported revenue growth, the company has made several acquisition like SK
Encar, Excellent international look through revenue growth of 79% with good organic growth
in all international businesses on a constant currency basis (Ding, 2016).
Table showing the different IPO of the company from the different sectors.
Company Name Industry Date of IPO Amount intended
to raise
Amount Actually
raised
The purpose
of the funds

6
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Virtus Health Health care Equipment Jun-13 $ 346.5 Million $310 Million
Funding of
Assisted
Reproductive
Project
GDI property Real estate Dec-13 $ 567.7 Million $ 287 million
Funding its
Project on the
real Estate
Carsales.com Automobiles Sep-09 $ 850 million $850 Million
For Expanding
its Business
Operation.
Answer to part (B)
Cost effectiveness examination of an IPO for long term Finance.
When a company needs long terms finance to do their business they have two option
to choose either debt financing through financial institution or equity financing through an
IPO. In case of an IPO, the company sales the ownership of the company in the form of share
to the investor in order to raise capital (Dwyer & Kotey, 2015).
IPO is considered to be costly in comparison of the debt financing, this is because the
debt is generally secured by the mortgaged of the real estate property, machinery or the
inventory. So there is security in the hand of the lenders, to in cash the mortgage property to
recover his loan amount, in case the borrowers default in the payment of interest on time.
On the other hand this features is not available in the case of equity financing.
Another reason for the high cost of the equity financing is that, in case the company get
bankrupt or insolvent, the holder of the debt is paid first with their interest and principle.
While equity holders are paid in the last stages, further the company will not pay any
dividend to the equity shareholder if the making losses, but the company has to pay interest

7
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
on the loan to the lender or the banks, even in the case of the loss. Therefore it can be said
that IPO are the expensive process of securing the long term sources of finance (Graham, &
Harvey, 2018).
To prove the above statement cost of capital of virtus health has been calculated using CAPM
approach in the year 2014 and 2015.
Calculation of cost of equity using capital assets pricing model
Company Name One year before the IPO One year after the IPO
Virtus Health 1.782 2.071
Working showing the Cost of equity using the CAPM Model
Ke = Rf +Be *(Rm-Rf)
Particulars 2014 2015
Rf( Risk free Rate ) 1.89 1.89
Be( Beta) 1.08 2.59
Rm( Market risk premium) 1.79 1.96
Ke = Rf +Be *(Rm-Rf) 1.782 2.0713
Expenses which the company has to incuurred while listing their share in an IPO
Particulars Amount
IPO Listing cost 10651000
Share payment cost 6827000
Debt restructure cost 11600000
Interpretation: Cost of Equity of the company rises from 1.782 to 2.071 after the issue of
IPO.

8
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Answer to part (C)
Factor related to the Underpricing of share in an IPO.
Underpricing is basically the listing of the company share in an IPO below its market
value. A company share is considered to be trading at underpriced, when the offer price of the
stock was lower than the first day trading price of the share (Handa, & Singh, 2014). When a
company bring the IPO of the share, their aim is to raise more capital from the public, by
issuing the minimum number of share. This can only happen when the price of the share is
offered high and the general public have confidence in the business of the company.
On the other hand promoter or the investment banker of the company whose objective
is to float more number of share of the company in the IPO to reach the general masses and
book a handsome amount of profit on the company share by the fluctuation in the share price.
So the investment banker aims to float the share at lower price in order to earn maximum
commission and the profit (Hughes & Mester, 2013).
Determining the share price of the company on the IPO depends upon the several
factors and one such factors include quantitative factors. Which include reviewing the
financial position of the company bringing IPO, like the investment banker analysis the firm
financial cash flow, income statement, balance sheet. In an IPO the share price of the
company depends broadly on two factors like company present earning and the expected
earnings growth. Therefore its can said that the company share price in an IPO differs from
company to company based on their fundamental, business operation, market position and
many more.

9
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
In the given case of Virtus health, the company announced its IPO in the year 2013,
the offer price of the company, $ 5.68 and at the 9% higher than the listing which amount to
be $6.20. Therefore the share is valued underpriced (Khadafi, Heikal, & Ummah, 2014).
Table showing the under or over valuation of share on the date IPO.
Company Offer Price (A) Opening Price (B) Closing Price (C) A < C ?
Virtus health 5.68 6.07 6.2 Yes , Underpriced
GDI property 1 0.95 90 No, Overpriced
Carsales.com 3.5 3.92 3.92 Yes , underpriced
Answer to part (D)
Analysing the Impact of the Economy on the Cyclical Stocks.
A share of a company fall in the category of the cyclical stock, when the price of the
stock is affected by the price of the macroeconomic factors, or with the systematic changes in
the overall economy. Cyclical stocks have the tendency to follow the economic life cycles,
through growth, peak, downturn, and retrieval (Kuk, Liu & Pham, 2015).
Cyclical stock company is generally engaged in the production, distribution of the
discretionary goods that the customer opted to buy less in the recession.
Some of the most common cyclical stock belong to the industries of the car
manufacturer, furniture, garment and Clothing Company, hotels and spa. The stock of these
company rise and fall with the economy. When the economy is predicted to perform well the

10
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
investor try to buy the share of these cyclical stock, as assuming that in a high growth
economy , people will have money and spend their money in buying homes, cars , Air
conditioner. Such that the business of these company will grow, and rise with the economic
life cycle (Lee, 2013).
On the other hand when the economy is performing poor, then these stock price fall
sharply and there is chances that the company may get bankrupt or insolvent. Since cyclical
stocks have the greater volatility, and they generate higher return on the investment in the
case of booming economy and vise-versa.
Statistic showing the performance of the cyclical stock.

11
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Answer to part (E)
There can be several objective of issuing an IPO, some of the reasons could be to convert
a private company to public or converting back the public to private company. However there
can be some other objective as for the issue of an IPO (Lukanima, & Swaray, 2013).
 The company can use the fund for the research and development, funding of the
heavy expenditure project, or in the settlement of their long-term debt.
 Increased in the public awareness about the company business, which ultimately lead
to the increase in the market share of the company.
 IPO is the best way for many venture capitalist to sell their shareholding in the
company. Generally venture capitalist objective is to track a potential startup, fund
them with the necessary capital for their business, and ultimately sale their holding in
the company in an IPO to earn huge profit (Mayur, 2017).
However there are certain disadvantages the company has to face while listing their share in
the IPO. Some of them listed below.

12
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
 The company have to comply with lots of legal and procedural requirement of the
regulation which are conducted by the Securities and Exchange Commission. This
involved tons of paper works as a result the management of the company have to
involve in the process 6-8 months before the issue of the IPO, this result in the
hampering the normal business process of the company (Murrell, 2014).
 The cost of conforming to the regulatory obligation can be very expensive. Some of
the major expenses include Brokerage payment to the Investment bank, cost incurred
in the generation of the financial reporting document, fees of the statutory auditor,
expenses involvement in the payment of the accounting oversight committees.
 Due to the volatility of the market public companies also faces the extreme pressure,
hence they are forced to focus on the short term results rather than the long-term
growth. On the other hand the action taken by the management for the sustainable
development are also being scrutinized. This is because the investor is looking for the
short term profit in the company shares.
So before going public a company must evaluate its present situation and conditions. Both the
advantages and disadvantages must be carefully analyzed.
Charts showing share price movement on the ASX in the last 5 year 2014 to 2019.

13
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX

14
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Calculation showing the growth of the share price after the listing was done on the IPO.
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Fall %
Growth
%
Virtus Health
Ltd 8.78 7.9 6.5 6.32 5.25 -94.75
[2014] [2018]
GDI Property 0.88 0.87 0.85 0.99 1.25 29.6
[2014] [2018]
Car sales.com 5.35 4.7 4.68 7.49 10.25 47.80488
[2010] [2014]
Answer to part (F)
Dividend are considered to be the most popular source of Income among the
shareholder. Company who declare dividend on a regular basis, is considered to be good
performing company, but the reality is different. There are possibilities that the company who
withhold the dividend, because the company wanted to fund their new investment project or
expanding its business operation (Chatalova, How, & Verhoeven, 2016).
Therefore the share price of the company fluctuate with the sentiment of the market.
There it can be possible that the fundamentally strong company share price may fall with
respect to the weaker company due to the declaration of dividend. Therefore the company
who declare dividend are perceived as financially stable, and they are promoted as the best
buying option, particularly amongst buy-and-hold stockholders who are utmost likely to
profit from dividend declaration.

15
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Conclusion
From the detailed analysis of the report, it can be concluded that business entity has
the two option to raise long term sources of finance either through the financial institution or
through the issuing of share through an IPO. The report discusses the cost effectiveness of the
fund raised through the IPO with respect of the fund raised through the financial institution.
For this purpose the cost of capital has been calculated for three business firm listed
on ASX using the CAPM approach and an evaluation has been made to identify the best
sources of finance to raise the capital. At the end of the report different objectives of an IPO
has been discussed.

16
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
References
Bewley, R. (2013). A fresh look at broker forecasts. Professional Planner, (53), 38.
Brusov, P. N., Filatova, T. V., & Orekhova, N. P. (2013). A qualitatively new effect in
corporative finance: abnormal dependence of cost of equity of company on
leverage. Journal of Reviews on Global Economics, 2, 183-193.
Carey, P., Fang, V., & Zhang, H. F. (2016). The role of optimistic news stories in IPO
pricing. Journal of International Financial Markets, Institutions and Money, 41, 16-
29.
Chatalova, N., How, J. C., & Verhoeven, P. (2016). Analyst coverage and IPO management
forecasts. Journal of Corporate Finance, 39, 263-277.

17
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Ding, R. (2016). Disclosure of Downside Risk and Investors' Use of Qualitative Information:
Evidence from the IPO Prospectus's Risk Factor Section. International Review of
Finance, 16(1), 73-126.
Dwyer, B., & Kotey, B. (2015). Financing SME growth: The role of the National Stock
Exchange of Australia and business advisors. Australian Accounting Review, 25(2),
114-123.
Graham, J. R., & Harvey, C. R. (2018). The equity risk premium in 2018.
Handa, R., & Singh, B. (2014). Governance Structures of Indian IPO Firms. South Asian
Journal of Management, 21(4).
Hughes, J. P., & Mester, L. J. (2013). Who said large banks don’t experience scale
economies? Evidence from a risk-return-driven cost function. Journal of Financial
Intermediation, 22(4), 559-585.
Khadafi, M., Heikal, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA),
return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and
current ratio (CR), against corporate profit growth in automotive in Indonesia Stock
Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12).
Kuk, J., Liu, W. M. R., & Pham, P. K. (2015). Strategic order submission and cancellation in
pre-opening periods: the case of IPO firms. Peter Kien, Strategic Order Submission
and Cancellation in Pre-Opening Periods: The Case of IPO Firms (September 1,
2015).
Lee, A. (2013). Fonterra Shareholders' Unit IPO explained: a new model for co-
operatives. International Financial Law Review.

18
EVALUATING THE FUND RAISING THROUGH AN IPO ON ASX
Lukanima, B. K., & Swaray, R. (2013). Economic Cycles and Stock Return Volatility:
Evidence from the Past Two Decades. International Journal of Economics and
Finance, 5(7), 50-70.
Mayur, M. (2017). Relationship between global stock exchanges and Indian stock
market. Asian Journal of Empirical Research, 7(2), 28-41.
Murgulov, Z., Marsden, A., Rhee, S. G., & Veeraraghavan, M. (2017). Venture capital‐
backed and commitments test entity initial public offerings on the ASX. Accounting
& Finance.
Murrell, T. (2014). Secrets of a successful IPO. Governance Directions, 66(2), 77.
Reddy, K., & Clinton, V. (2016). Simulating stock prices using geometric Brownian motion:
Evidence from Australian companies. Australasian Accounting, Business and
Finance Journal, 10(3), 23-47.
Zhou, Q., Tan, K. J. K., Faff, R., & Zhu, Y. (2016). Deviation from target capital structure,
cost of equity and speed of adjustment. Journal of Corporate Finance, 39, 99-120.