Finance Management - Assignment Solution

MANAGING FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
(a) Evaluation of use of fund from IPO(initial public offering) by three companies listed in
ASX..............................................................................................................................................1
(b) Literature review on IPO are a costly way of raising long term finance for corporations.....2
(c) Underpricing of the IPO at the end of first day......................................................................2
(d) Pattern of IPO activity on ASX during the 2007 to end of 2017...........................................3
(e) Evaluation of share price performance after the IPO.............................................................3
(f) Changes in the above situation if additional dividend is given by the companies.................4
CONCLUSION ...............................................................................................................................4
REFERENCES...............................................................................................................................5

INTRODUCTION
Management of finance is very important to proper allocation of fund. Companies use
different methods to manage the financial needs(Denis, 2012). Eventually best way of raising the
fund is the issuing of shares to the general public that is called initial public offering(IPO).
Though this method of raising the fund has both the aspects negative and positive. Herein, the
project report three companies from Australian securities exchange(ASX) are selected who offer
IPO of $100 million. As well as this project report highlights on impact on companies financial
performance due to issuing of IPO.
MAIN BODY
(a) Evaluation of use of fund from IPO(initial public offering) by three companies listed in ASX.
Companies offer IPO in general public to raise their fund and they use this fund in multi-
pal purposes(Pompian, 2012). The use of this fund can be for increasing the working capital or
for financial viable projects. Herein three companies which are listed in the ASX raises fund of
$100 million during 8 years time period. The Spheria emerging company limited 's IPO exceed
over $100 million which is a milestone(About IPO of Spheria emerging company limited.,2019).
As per their annual report, they used their fund for their investment purposes. Due to this raised
capital, company invested this amount of money for personal investment projects for enhancing
the liquidity.
The second company is Tribeca resource private limited, that offer IPO to gain the capital
of $250 million(100 million shares @ $2.50 each share) (About IPO of Tribeca resource private
limited,2019). The company is listed in the Australian securities exchange. The main purpose of
company to offer IPO was to support the new listed company Tribeca global natural resource
limited.
The third company is Nine entertainment co. limited, raised the capital of $577 million
through IPO (About IPO of Nine entertainment co limited, 2019). The objective of the company
to raise the capital through IPO was to increasing the working capital. Due to this fund, they are
able to raise their working capital requirements.
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(b) Literature review on IPO are a costly way of raising long term finance for corporations.
The initial public offering is the way of issuing the shares to the general public to get the
fund in huge volume. The companies issues the shares in different quantity as per the need of
capital. Eventually, this way of raising capital is quite costly. Herein, some literature review on
this topic are mentioned below:
According to the Denis, the cost of raising fund is quite high because it consists various
charges like banker fees, underwriter commission, legal fees etc. Due to this the IPO becomes
expensive way of raising the long term fund.
Apart from it, another issue of IPO is that because of this, companies have to give rights
to the general public as well as they have to publish their financial reports for public. Due to this
companies privacy disturbs.
On the other hand, due to IPO the equity capital also increase like in the Spheria
emerging company limited, their equity capital raised by $7096000. Before the initial public
offering their equity capital was $132675000 and after it became $139771000 (About financial
statement of Spheria emerging company limited,2019). So due to this equity capital raised by
huge margin. In the Tribeca resource private limited, their equity capital has not increased
because they use the raised fund for their new listed company. Apart from it, the Nine
entertainment co. limited raised their long term fund for enhancing the working capital and after
the IPO, their working capital increased.
(c) Underpricing of the IPO at the end of first day.
IPO underpricing means increasing the stock value due to initial offering price to the first
day closing price(Vasigh, Taleghani and Jenkins, 2012). Herein, the ASX the underpricing of the
shares are different from each industries. Like in the Spheria emerging company limited, the
opening price of share was the $1.94 at the opening of the day and it decreased at the end of the
by 9%. It became $1.77. So the share price after the IPO decreased in the Australian securities
exchange. Same as in the Trebica resource pvt limited, their opening share price on the start of
day was $2.520 that increased by some margin and became $2.60 per price. Additionally, in the
nine entertainment co. limited company their share price at the ASX was the $1.658 per share on
the start of day which decreased by some criteria and became $1.52 per price. So this data of
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different companies state that share price after the ASX is different from each other. As well as
due to this company's EPS also effect because it is totally depends on the share price.
(d) Pattern of IPO activity on ASX during the 2007 to end of 2017.
The IPO activity of ASX is cyclical, it changes in as per the different years. This is why
because companies offer their shares through IPO according to their purposes. Like above
mentioned three companies offer the initial public offer for as per their needs. In the aspect of
Australian security exchange, about 96 IPO offered by the companies in the year of 2017 which
was 5.6% of global IPO s. As well as in the recent years 85 IPO offered by the ASX listed
companies that was 6.3% of the global IPO(About pattern of IPO in ASX, 2019.). So the trend of
change in the initial public offering is a common activity because it is not under control of the
stock exchange. It depends on the company and their needs.
Herein, the context of ASX, the change in the IPO in the recent years during 2007 to
2017 impacted to the Australian economic growth. Due to certain changes in the trend of the
initial public offering of Australian security exchange, the economic growth of country increased
and improved. The reason behind this, is that if more IPO are issued for the general public then
people will a source of income that will raise per individual income. As well as flow of fund in
the market will increase.
(e) Evaluation of share price performance after the IPO.
Eventually, the main objective of IPO is the increasing the capital but in recent years in
the context of ASX the performance per share price is decreasing. The reason behind this is that
issuing more number of IPO and due to this ownership gets divided into the different
shareholders. As well as the company's financial performance of companies get down, if more
shareholders means company's profits will be divided into many holders. Herein, the aspect of
above mentioned three companies of the ASX, face the problem of the lower share price after the
IPO. Like in the Spheria emerging company limited, their share per price decreased in the recent
3 to 5 years after the initial public offering. Their share price per share was the $1.770 which
decreased after the huge IPO of the $100 million. After this, their share price was of $1.755.
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Same as in the Tribeca resource private limited, their share per price decreased after
initial public offering. As well as in the Nine entertainment co. limited, their share price
decreased like in the year of 2014, it was of 0.07 (About share price of nine star entertainment
limited,2019). It decreased in the next year 2015 and became -0.63. So these data states that
share price of companies continuously decrease after the IPO and reason is the increasing the
number of shareholders.
(f) Changes in the above situation if additional dividend is given by the companies.
In the above part (e), companies face the issue of the lower share price after the IPO.
Herein, if companies pay the dividend to the shareholders then their financial situation can
become more weak. This why because companies have to pay the dividend to different
shareholders from their earnings. As well as companies will have less amount of profit for
internal uses. Though, IPO is not a bad option for raising the fund but if there are more
shareholders then it can be difficult for the companies to pay the dividend. So after the dividend
payment the situation can be worst from above context.
CONCLUSION
From above project report it has been concluded that management of finance is necessary
for the companies. Mostly organisations issue their share in the public for raising their finance.
This way of raising capital is getting harder to use for the companies due increasing more
shareholders. Due to this companies privacy gets disclose among the general public. Apart from
it, the project report concludes about the effect on the EPS after the issuing of share in general
public as well as IPO is becoming an expensive way of fund raising. Herein, the project report
recent trends in the initial public offering in the aspect of ASX(Australian security exchange) are
concluded.
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REFERENCES
Books and journals:
Denis, D .J., 2012. The persistent puzzle of corporate capital structure: Current challenges and
new directions.Financial Review. 47(4). pp.631-643.
Pompian, M .M., 2012.Behavioral finance and investor types: managing behavior to make better
investment decisions. John Wiley & Sons.
Vasigh, B., Taleghani, R. and Jenkins, D., 2012.Aircraft finance: Strategies for managing capital
costs in a turbulent industry. J. Ross Publishing.
Online
About IPO of Spheria emerging company limited. 2019. [Online]. Available
through:<https://www.spheria.com.au/ipo-alert-spheria-emerging-companies-ipo-
exceeds-100m/>
About IPO of Tribeca resource private limited.2019. [Online]. Available
through:<https://www.businesswire.com/news/home/20180902005045/en/Tribeca-
Launches-IPO-Long-Short-Global-Natural>
About IPO of Nine entertainment co limited. 2019. [Online]. Available
through:<https://www.reuters.com/article/australia-nine-ipo/rpt-update-2-australias-
nine-raises-577-mln-in-closely-watched-ipo-idUSL4N0JJ43E20131204>
About financial statement of Spheria emerging company limited. 2019. [Online]. Available
through:<https://www.spheria.com.au/wp-content/uploads/2017/10/SEC-Annual-
Report-2018.pdf>
About share price of nine star entertainment limited. 2019. [Online] Available
through:<http://financials.morningstar.com/ratios/r.html?
t=NEC&region=aus&culture=en-US>
About pattern of IPO in ASX. 2019. [Online] Available through:
<https://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-report-q4-
2018/$FILE/ey-global-ipo-trends-report-q4-2018.pdf>
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