Managing Finance

This assessment evaluates the performance of Australian IPOs to understand the presence of underpricing in the capital market. It provides information about the IPO activity of selected companies, calculation for cost of equity, presence of underpricing, change in Australian IPO activity, performance of IPO with Australian index, and performance of IPO dividends vs Australian index.

Running head: MANAGING FINANCE
Managing Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
a. Analysing the IPO activity of selected companies and depicting the funds that was used in
by the management:...................................................................................................................2
b. Identifying the calculation for cost of equity of the IPO’s by understating the minimum
returns needed by investors:.......................................................................................................4
c. Providing information about the presence of the under-pricing and how it changes from
industry to industry:...................................................................................................................5
d. Discussing about the change in Australian IPO activity from 2007 to 2017, while depicting
about the Australian economy:...................................................................................................6
e. Providing information about the performance of the IPO with Australian index:.................7
f. Providing information about the performance of the IPO dividends vs Australian index:....8
Conclusion:................................................................................................................................9
References and Bibliography:..................................................................................................10

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Introduction:
The assessment evaluates the performance of Australian IPOs to understand the
presence of underpricing in the capital market. Furthermore, adequate information has been
provided in the assessment regarding the overall presence of underpricing by evaluating three
initial public offerings conducted in 2013. Moreover financial performance of the companies
is compared with the Australian index determine whether the investors were able to generate
higher returns from their investments during the IPO. In addition, the change in cost of equity
is also conducted to detect the change in cost of capital due to the issue of shares conducted
by the organization.
a. Analysing the IPO activity of selected companies and depicting the funds that was
used in by the management:
Company Name
Industr
y
Date
of
IPO
Amount
intended
to raise
Amount actually
raised The purpose of the funds
Hotel Property
Investments
Real
Estate
Jun-
13 279 $279m
Improve
capital management
flexibility, To be paid to the
Existing Unitholders,
Refinancing of existing
debt, Working capital and
Transaction costs
Pact Group Material
Jun-
13 648.8 $648.8m
Increasing the market for
liquid market for the shares,
improving capital structure
and financial flexibility,
improving the future on-
going access and improving
its working capital
requirements
Virtus Health
Healthc
are
Equipm
ent
Jun-
13 346.5 $346.5m
Funds to repay, in part,
existing debts of Virtus’
business and additional
financial flexibility to
pursue the growth
opportunities

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Company Industry
Date
of
IPO
Amoun
t
Raised
Offer
price
Closing price on
first day of
trading
Return on
first day of
trading
Hotel
Property
Investments
Real
Estate
Dec-
13 $279m 2.1 1.94 -7.62%
Pact Group Material
Dec-
13
$648.8
m 3.8 3.34 -12.11%
Virtus Health
Healthcare
Equipment
Jun-
13
$346.5
m 5.68 6.28 10.56%
Hotel Property Investments:
The information provided in the above table directly indicates that the initial public
offering of Hotel property investments was conducted in June 2013. The organization
provided of a price of 2.1 while the price at the close the first day was at the levels of 1.94,
which indicated a loss in the share value of -7.62% (Asx.com.au, 2019). Moreover, the
company raised 279 million from the share issue, which intends to refinance its existing debt,
to support its working capital and use the proceeds as transaction cost. Furthermore, the
organization also aims to improve its Capital Management flexibility while paying the
existing unit holders of the organization.
Pact Group:
The initial public offering of Pact Group Was conducted in December 2013 where the
organization aimed to acquire 648.8 million from its share issue. Moreover, the offer price
initiated by the management was at the levels of 3.38, while the closing value for the first day
was 3.34, which is -12.11% is lower than the offer price (Asx.com.au, 2019). Furthermore,
the company initiated the initial public offering to support its capital structure flexibility and
improve the financial capitals that could be used in the long run. Additionally the
organization also aims to use the proceeds from the share issue as working capital
requirements and future development.
Virtus Health:

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In the similar instance the public offering of Virtus Health was conducted in June
2013, where the management in race 346.5 million from the capital market. This process was
mainly initiated to fund its debt repayment structure, while adding financial flexibility to the
operations of the company (Asx.com.au, 2019). Moreover, the proceeds of the share issue
were also intended to improve and bank on the growth opportunities that would be presented
to the organization. The first day closing value of the organization was at the levels of 6.28,
which is relatively higher than 5.68 offer price. This indicates that the overall gain that was
achieved by the investors was at the level of 10.56%.
b. Identifying the calculation for cost of equity of the IPO’s by understating the
minimum returns needed by investors:
Particulars
Pact Group Hotel Property Investment Virtus Health
G 10.0% 10.0% 10.2362%
P0 2.69 1.98 8.1600
D1 0.10 0.17 0.7000
Ke 13.53% 18.47% 18.8147%
Cost of equity is considered an anticipated returns that provided by the organization
investors after the financial year. Moreover, the above calculations directly state about the
change in cost of equity witnessed by the IPOs after the share issue. However, before the
initial public offering the organization have no kind of cost of equity, and all the relevant
incomes are provided to the owners. Nevertheless, after initial public offering the cost of
equity of an organization is determine which is used in driving the weighted average cost of
capital which allows them to make adequate investment decisions in the long run. The
calculation has directly indicated that the above IPOs had relevantly high cost of equity due
to the high level of risk involved in investments (Badru & Ahmad-Zaluki, 2018).

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c. Providing information about the presence of the under-pricing and how it changes
from industry to industry:
Underpricing of an IPO Is a major concern for maximum of the organization as it
reduces the overall offer price that that is required to obtain the targeted funds. There has
been relevant research conducted on the presence of underpricing in different economy and
industries where it could be identified that underpricing is present in each and every industry
regardless of their performance. The relevant research has been conducted in US where more
than 8000 IPOs for evaluated to identify the presence of underpricing during the share issue.
It has seen detected that overall 18% of the price reduction was conducted due to the presence
of underpricing, which actually allowed the organization to acquire the required funds from
their share issue (Sundarasen, Khan & Rajangam, 2018). The similar instance is seen in the
overall Australian economy as it is also influenced by underpricing during the IPOs, where
reduction of 16.6% is witnessed by majority of the IPOs conducted in the country. One of the
major examples present in Australia is JB hi fi, whose initial public offering was relatively
underpriced. However, the organization has provided exponential returns to the investors
over the period of its incorporation. This directly indicates that investors are lured in after the
underpricing, as they intend to aim higher returns in the long run. Derouiche, Sassi & Toumi
(2018) argued that IPOs are mainly a risky endeavor, which is conducted by investors, as
they are not able to conduct past performance to determine the current valuation of the
organization.

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d. Discussing about the change in Australian IPO activity from 2007 to 2017, while
depicting about the Australian economy:
Year
2007 Year
2008 Year
2009 Year
2010 Year
2011 Year
2012 Year
2013 Year
2014 Year
2015 Year
2016 Year
2017
0.000
50.000
100.000
150.000
200.000
250.000
300.000
-100.000%
-50.000%
0.000%
50.000%
100.000%
150.000%Year 2007; 41.304%
Year 2008; -71.154%
Year 2009; -44.000%
Year 2010; 135.714%
Year 2011; 6.061%
Year 2012; -51.429%
Year 2013; 19.608%Year 2014; 19.672%
Year 2015; 32.877%
Year 2016; -3.093%
Year 2017; 22.340%
IPO Activity
IPO Activity in last 10 years IPO Activity %
Year
IPO Activity in last 10
years IPO Activity %
Year 2007 260.000 41.304%
Year 2008 75.000 -71.154%
Year 2009 42.000 -44.000%
Year 2010 99.000 135.714%
Year 2011 105.000 6.061%
Year 2012 51.000 -51.429%
Year 2013 61.000 19.608%
Year 2014 73.000 19.672%
Year 2015 97.000 32.877%
Year 2016 94.000 -3.093%
Year 2017 115.000 22.340%
Change in initial public offering activity is mainly depicted in the above table and
graph which highlights overall changes in the economy of Australia. Initial public offering is
mainly conducted by companies during and economic boom, which allows them to acquire
the required capital for their operations. This similar instance can be seen in the above table,

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where during the financial crisis of 2008 the overall IPO activity of Australia declined by -
71.154%, which was a fall of 260 to 75 IPOs in a year. This directly indicates that initial
public offerings are mainly conducted during economic boom. Moreover, after the financial
crisis overall fluctuations in IPO market is mainly seen in the above graph, where after 2012
performance of IPO has increased throughout 6 years. Hence, it is indicated that the
performance of Australian economy is directly related to the IPO activity (Helbing, 2018).
e. Providing information about the performance of the IPO with Australian index:
Hotel Property Investments
Share
price Return
All Ordinaries
Index Return
2013 1.98 5353.08
2014 2.69 35.9% 5388.14 0.7%
2015 2.66 -1.1% 5344.6 -0.8%
2016 2.84 6.8% 5719.14 7.0%
2017 3.33 17.3% 6167.2 7.8%
Growth rate 58.8% 14.7%
Pact Group
Share
price Return
All Ordinaries
Index Return
2013 2.69 5353.08
2014 4.19 55.8% 5388.14 0.7%
2015 4.98 18.9% 5344.6 -0.8%
2016 6.69 34.3% 5719.14 7.0%
2017 5.68 -15.1% 6167.2 7.8%
Growth rate 93.9% 14.7%
Virtus Health
Share
price Return
All Ordinaries
Index Return
2013 8.82 5353.08
2014 7.81 -11.5% 5388.14 0.7%
2015 6.50 -16.8% 5344.6 -0.8%
2016 6.24 -4.0% 5719.14 7.0%
2017 5.26 -15.7% 6167.2 7.8%
Growth rate -47.9% 14.7%

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The information provided in the above table directly indicates about the growth in
share value of the three IPOs for the past 5 years. Moreover, the return that is generated by
the above IPOs is mainly compared with Australian index to determine the overall written
that has been generated by the stock investors. From the calculation, it is detected that only
Virtus Health was not able to generate higher returns than the Australian index, whereas other
organization has provided exponential returns in comparison to the index (Kamaludin &
Zakaria, 2018).
f. Providing information about the performance of the IPO dividends vs Australian
index:
Hotel Property Investments
Share
price Dividend Return
All Ordinaries
Index Return
2013 1.98 0 5353.08
2014 2.69 0.1678 44.3% 5388.14 0.7%
2015 2.66 0.174 5.4% 5344.6 -0.8%
2016 2.84 0.315 18.6% 5719.14 7.0%
2017 3.33 0.197 24.2% 6167.2 7.8%
Growth rate 92.5% 14.7%
Pact Group
Share
price Dividend Return
All Ordinaries
Index Return
2013 2.6900 5353.08
2014 4.1900 0.095 59.3% 5388.14 0.7%
2015 4.9800 0.195 23.5% 5344.6 -0.8%
2016 6.6900 0.21 38.6% 5719.14 7.0%
2017 5.6800 0.23 -11.7% 6167.2 7.8%
Growth rate 109.7% 14.7%
Virtus Health
Share
price Dividend Return
All Ordinaries
Index Return
2013 8.82 5353.08
2014 7.81 0.26 -8.5% 5388.14 0.7%
2015 6.5 0.27 -13.3% 5344.6 -0.8%
2016 6.24 0.29 0.5% 5719.14 7.0%
2017 5.26 0.25 -11.7% 6167.2 7.8%
Growth rate -33.1% 14.7%

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Moreover, the above table provides information about the returns of the IPO With the
ones that has been provided over the period of 5 years. Therefore, from the overall return
calculation that after adding the dividends the returns generated by the organization increased
in value, which is due to the high level of dividends. However, the losses incurred by the
investors in Virtus Health are still used in comparison to the Australian index. This directly
indicates that investment in IPOs could allow the investors to generate high level of income
in the long run (Gounopoulos, Kraft & Skinner, 2018).
Conclusion:
The analysis conducted in the Overall assessment directly indicates about the
presence of underpricing in IPOs. Moreover from the analysis it is directly indicated that
underpricing is conducted during the initial public offerings of an organization, as it allows
them to attract more investors and complete the share issue process without any hindrance.
Furthermore, the analysis also indicates that investors can use the initial public offering as an
adequate investment opportunity to generate high level of returns from investment, as two of
the IPOs used in the assessment provided exponential returns during the past 5 years.

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References and Bibliography:
Asx.com.au. (2019). Asx.com.au. Retrieved 30 April 2019, from https://www.asx.com.au/
Badru, B. O., & Ahmad-Zaluki, N. A. (2018). Explaining IPO initial returns in Malaysia: ex
ante uncertainty vs signalling. Asian Review of Accounting, 26(1), 84-106.
Bhagat, S., Lu, J., & Rangan, S. (2018). IPO Valuation. In The Oxford Handbook of IPOs (p.
108). Oxford University Press.
Boulton, T., Smart, S., & Zutter, C. (2018). Determinants of Variation in IPO Underpricing.
In The Oxford Handbook of IPOs (p. 81). Oxford University Press.
Cirillo, A., Mussolino, D., Saggese, S., & Sarto, F. (2018). Looking at the IPO from the “top
floor”: a literature review. Journal of Management and Governance, 22(3), 661-688.
Derouiche, I., Sassi, S., & Toumi, N. (2018). The control-ownership wedge and the survival
of French IPOs. Journal of Applied Accounting Research, 19(2), 271-294.
Gounopoulos, D., Kraft, A. G., & Skinner, F. S. (2018). Voluntary vs. mandatory
management earnings forecasts in IPOs. Mandatory Management Earnings Forecasts
in IPOs (May 11, 2018).
Helbing, P. (2018). A review on IPO withdrawal. International Review of Financial Analysis.
Kamaludin, K., & Zakaria, N. (2018, April). The Short and Long-Run Initial Public Offerings
(IPOs) Performance in the Emerging Market: Evidence From Saudi Arabia Share
Market. In 31st International Business Information Management Association
Conference Proceedings (pp. 25-26).

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Khan, S., Ramakrishnan, S., Haq, Z. U., Ahmad, M., & Alim, K. (2018). Determinants of
IPO’s Long-run Performance: Case of Pakistan Stock Exchange.
Li, R., Liu, W., Liu, Y., & Tsai, S. B. (2018). IPO Underpricing After the 2008 Financial
Crisis: A Study of the Chinese Stock Markets. Sustainability, 10(8), 2844.
Sohail, M. K., & Farhat, R. (2018). What Happened to the Investors of South Asian Countries
While Investing in the Newly Listed Firms: A New Approach?. Journal of
Economics, Business, and Management, 6(4), 150-154.
Sohail, M. K., Raheman, A., Zakaria, M., & Farhat, R. (2018). IPO Underpricing
Phenomenon on the Karachi Stock Exchange. Argumenta Oeconomica, 41(2), 225-
255.
Sohail, M., Bilal, H., Rukh, L., & Fatima, S. (2018). Determinants of Under Pricing of Initial
Public Offerings and its Long Run Performance in Pakistan. Pakistan Journal of
Social Sciences (PJSS), 38(2).
Sundarasen, S. D., Khan, A., & Rajangam, N. (2018). Signalling roles of prestigious auditors
and underwriters in an emerging IPO Market. Global Business Review, 19(1), 69-84.
Tajuddin, A. H., Abdullah, N. A. H., & Taufil Mohd, K. N. (2018). Shariah-compliant status
and IPO oversubscriptions. Journal of Islamic Accounting and Business
Research, 9(4), 531-548.