FINA6000: Managing Finance - IPO Case Analysis on BHP Billiton

This report provides a detailed case analysis of Initial Public Offerings (IPOs) in the Australian market, using BHP Billiton as a primary example. It examines the high costs associated with IPOs, the phenomenon of underpricing, and the impact of these factors on a company's financial performance. The report investigates the reasons companies undertake IPOs, evaluating them as a costly method of long-term finance, comparing issue and closing prices to verify underpricing, and analyzing share performance over a 3-5 year period. The analysis includes an examination of dividend payout policies and their evolution since the IPO. The report utilizes financial data and academic literature to support its findings, offering insights into capital raising strategies and their effects on businesses listed on the Australian Securities Exchange (ASX). The report concludes by summarizing the key findings and implications for financial management and investment decisions.

Running head: MANAGING FINANCES
Managing Finances
Name of the Student
Name of the University
Author’s Note

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Executive Summary
This current report has focused on the identification of the initial public offering on the
Australian Securities Exchange of the period of eight years. In this study, BHP Billiton has been
included that points out the IPO is one of the costliest way of raising the long term finances that
would assist the company in their long run business. The study also includes the selected IPO
that mainly extents in the under-pricing of the shares along with comparison of issued price and
closing price. It also includes the arguments against the data that has been gather in the overall
period of the company.

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Table of Contents
Introduction......................................................................................................................................3
Identifying the Initial Public Offerings and discussing the reasons why the IPO has been
undertaken........................................................................................................................................3
Critically evaluating the IPO that is a costly way of raising long term finance for the corporations
.........................................................................................................................................................4
Verifying the extent of under-pricing by comparing the issue price and closing share price of the
first day of trading...........................................................................................................................6
Evaluating the data that has been gathered by its share performances in 3 to 5 years that is listed
on ASX............................................................................................................................................7
Analysing the dividend pay-out policy that has been started from the date of IPO and changes
any strategy that has been analysed over the period of time...........................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Introduction
Managing the finances in an organisation is vital for an organisation as it includes all
kind of finances that helps the company in achieving their targets in a certain financial year. The
shares that are associated with the company includes the price of the shares that act as working
capital for the company. In this study, Australian Securities Exchange (ASX) has listed their
companies from which BHP Billiton has been taken into consideration for which the cost of
issuing the shares has been included in the overall includes of the investors of the company. The
process of identification of the initial public offering includes the effective advantage that helps
the company in achieving the goals and objectives in their normal course of business.
Identifying the Initial Public Offerings and discussing the reasons why the IPO has been
undertaken
Initial public offering is the certain type of public offering that help the company in
raising their long term finances for the company and helps in running smoothly of the total
amount of working capital. The public shares are issued by allowing the company to raise the
financial capital from the public investors (Boone, Floros & Johnson, 2016). It also includes the
transition that from a private limited company to a public limited company in which the
shareholders of the company generally realise the gains that includes in the share premium for
the private investors that are private in nature. The movement of the stock is one of the most
difficult aspects that helps the stock to create the platform along with actionable information for
promoting faster as well as smarter trade. The company that has been chosen is BHP Billiton that
has issued an IPO in the year 2013 for better gathering of capital for the company. The company
has issued the IPO in that particular year as the company has been running low in their capital
and for this reason the company has issued IPO to raise the capital that is working in nature.

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BHP Billiton is the Australian based mining company that mainly deals with the mining of
different types of metals along with other ores that includes the effective process of mining that
is performed by the company.
The company that is BJP Billiton is registered under the ticket which involves the stock
price of the shares that are associated with the business and has been recorded in the overall
process of initial public offerings (Liu, Uchida & Gao, 2014). The Australian Securities
exchange has listed the company for having more the $ 50 million which has been occurred from
the period of 8 years that has been recorded from the period of 2007 to 2013. The data has been
gathered from the prospectus of the company and also from the annual report of the company
that has been published by the management of the company. It has been reported that out of 178
IPO in the year 2008, almost 63 % of the IPO gave the negative returns but the remaining 37 %
of the IPO has turned positive that provides the company with certain amount of gains from the
selected IPO (Wang & Song, 2016). The IPO has been undertaken as the amount of profit is
more than the remaining loss which might incurred by the company during the process of issue
of shares.
Critically evaluating the IPO that is a costly way of raising long term finance for the
corporations
Equity financing is one of the way that helps in financing the company along with
including certain amount of as working capital. Raising of long term finances is one of the most
expensive way of raising the cost that includes the corporation for better management of the
finances in the normal course of business. As per the viewpoint of Liu, Sherman and Zhang
(2014), equity financing is the technical process that raises the total amount of capital by the
process of selling of shares to the public. In this particular process, the source of financing is the

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process by which the resources are being utilised by the funds which includes the ownership of
the companies for better management in future years. This particular term is reported as the
financing with the help of issuing the shares that would be beneficial for the company in long
term goals (Bateni & Asghari, 2014). The listed companies on the securities exchange also
applies to the debt financing that would be beneficial for the company in the overall process of
financing.
It is a costly process as it includes the issuing of shares that mainly incurs different types
of cost for effective source of financing. There are different types of equity financing that helps
in raising the sources of finances in the company along with involvement of certain cost that is
associated with sale of equity shares such as preferred stock that mainly includes the common
shares and warrants (Saboo, Kumar & Anand, 2017). The equity investors might use the debt
financing by hosting the common equity that helps the company in issuing the funds for the
company in upcoming years. If the company requires any kind of additional funds then the
company issue an initial public offerings that offers the cost of the shares at which the shares
would be sold to the shareholders. The national security authority mainly restricts the extensive
information which offers the memorandum to the public by which the public mainly purchases
the shares from the company (Baranchuk, Kieschnick & Moussawi, 2014). The company has
issued the IPO for raising the capital and for this particular process the company has incurred a
huge amount in the financial year. The company has incurred around $ 3.2 million for the overall
process of IPO in that particular financial year. The cost that is incurred by that includes the
every cost that has been incurred in the overall procedure which includes the every step that is
important for the overall process. The process of IPO includes planning, executing, managing
and implementing the overall process that might be interested to the public. Different companies

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in Australia offers the initial public offerings by which the allocation of share price is appointed
by the shareholders of the company.
Verifying the extent of under-pricing by comparing the issue price and closing share price
of the first day of trading
The issue price of the shares in the BHP Billiton is required to be compared with the
closing share price on the first day of trading in its normal course of business. The practice of
listing the initial public offerings at the price below than the real value in the market stock is also
coined as under-pricing of the stock. Based on the viewpoint of Ming and Hock Eam (2016), a
stock generally closes on the first day of trading which trades above the set initial public
offerings and the stock is mainly considered as under-priced shares. The introduction of new
stock in the public exchange on a stock exchange of a country mainly includes the effective raise
in its capital for its overall growth and development of the company. An IPO is mainly under-
priced to increase the demand along with encouraging the investors to take certain risks that are
directly associated with the company.
The price is generally underestimated as to create the demand that includes the market
stock which creates a higher demand in the overall stock of the company. The difference
between the first day of closing price and the last day of closing price is the set price for the IPO
that is mainly offered to the public for raising the funds (Terjesen, Bosma & Stam, 2016).
Different factors are considered during the pricing of a certain IPO that might be equally exact
from the marketable stock in the current economic environment. The IPO price reflects the price
to earnings ratio that points out the services of the company with current economic environment.
An IPO is required to be under-priced for recording the sponsors on the uncertain stock of the
company in their normal course of business. Therefore, the under-pricing of the shares is

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required to be compared with the issue price and closing price that ends in the first day of
trading. The comparison of the share price includes the issue price of the shares on the date of
IPO and closing price of the shares on the date of IPO (O'Connor Keefe, 2014). The issue price
is $ 47.36 and closing price is also $ 48.76 so, there is a difference in the price and the
comparison is around $ 1.4. Therefore, the share is under-priced by $ 1.4 which might affect the
overall process of IPO. The literature of IPO is related to the cost that is required to be incurred
in the overall process which would be available for the public during the process. It helps in
managing the capital for the company for better running of the business activities.
Evaluating the data that has been gathered by its share performances in 3 to 5 years that is
listed on ASX
The performances share includes in the period that deals with the different time period on
which the price of the shares can be gathered and the relevant changes can be seen over the time
period (Floyd & Skinner, 2015). The performances of the shares are recorded in the period of 3
to 5 years that has been listed on the ASX. BHP Billiton is the company that is listed in the ASX
and it has also been considered for gathering the information that has been incurred in the period
of 3 to 5 years. ASX has listed the company which has shared their share performance in 3 to 5
years and the performances of the IPO is poor. According to Plummer, Allison and Connelly
(2016), the listed IPO by the company is to attract the public for raising the funds that would be
beneficial for the company in their normal growth. The share performance of the company
includes the price of the shares for the period of three years which has been calculated at an
average form. The listed average price of share is mentioned and it can be seen that the following
price of the shares is in increasing trend which has been increased with increase in years
(Nguyen & Liu, 2014). Therefore, this increasing trend has been following the trend which is

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effective in the overall pricing of the shares in the 3 years period from the date of IPO. The
capital gain yield has been calculated which points out the difference between the current share
price and original price of the share. The evaluation has been provided which has a price change
of around $ 5.86. Therefore, the capital gain yield has been evaluated around 3.94 which is better
for the company as it has the scope for gaining more amount of capital for the company. All
ordinary index has been pointed as 1755.2 for which the comparison has been made for better
management strategy.
Analysing the dividend pay-out policy that has been started from the date of IPO and
changes any strategy that has been analysed over the period of time
The policy of dividend pay-has out from the date of IPO has helps in changing the
strategy that is required to be analysed over the period of time. The pay-out ratio is the amount of
dividend that is required to be included in the overall period of time (Bernstein, 2015). BHP
Billiton has the following dividend pay-out ratio which mainly points out the nature of
investment of the company that would be beneficial for the company and also for their investors.
In this scenario it can be seen that the company has the dividend pay-out ratio that has an
increasing trend which means that the company is more focusing on the stable income of the
investors (Yaakob & Halim, 2016). The dividend policy of the company is mainly focuses on the
pay-out of 50 % of the overall income to the investors as they mainly focuses on the income of
the investors. The payment of dividend on the second half of the year includes the attributable
profit for the each reporting period. The shareholders of the company is vital for cash return that
is required to be covered by the flow of cash which has been generated in that particular financial
year. The additional amount of capital is associated in the financial year that also includes the
date of IPO on which it has released the offer (Sg.finance.yahoo.com, 2019). Therefore the

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changes of strategy is remain unchanged as it mainly focuses on the stable income of the
investors.
Conclusion
From the above study, it can be concluded that the process of identification of the initial
public offering that is associated with the company which is required to be listed in the
Australian securities exchange. The Australian IPO has raised their long term finance with the
help of this particular process along with increasing the total amount of long term capital. IPO is
one of the costly process which helps the company to raise the finances in their normal course of
business. The conversion from one company to another company includes the particular process
that helps in raising the overall amount of finance for smoother business transactions. Investment
banks are the associated with the list of shares prices that requires certain advantages with the
effective communication among the employees of the organisation. In this study, initial public
offering has been considered as one of the way of issuing the long term finances that helps the
company in maintaining their total amount of long term capital. The dividend for the pay-out
policy is stated on the date of IPO which is used for gathering the information from their annual
report and prospectus.

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References
Baranchuk, N., Kieschnick, R., & Moussawi, R. (2014). Motivating innovation in newly public
firms. Journal of Financial Economics, 111(3), 578-588.
Bateni, L., & Asghari, F. (2014). Study of factors affecting the initial public offering (IPO) price
of the shares on the Tehran Stock Exchange. Research in World Economy, 5(2), 68.
Bernstein, S. (2015). Does going public affect innovation?. The Journal of Finance, 70(4), 1365-
1403.
Boone, A. L., Floros, I. V., & Johnson, S. A. (2016). Redacting proprietary information at the
initial public offering. Journal of Financial Economics, 120(1), 102-123.
Floyd, E., Li, N., & Skinner, D. J. (2015). Payout policy through the financial crisis: The growth
of repurchases and the resilience of dividends. Journal of Financial Economics, 118(2),
299-316.
Liu, J., Uchida, K., & Gao, R. (2014). Earnings management of initial public offering firms:
evidence from regulation changes in C hina. Accounting & Finance, 54(2), 505-537.
Liu, L. X., Sherman, A. E., & Zhang, Y. (2014). The long-run role of the media: Evidence from
initial public offerings. Management Science, 60(8), 1945-1964.
Ming, C., & Hock Eam, L. (2016). Estimating the nonlinear effects of female directors on
financial performance: the case of Malaysian initial public offering companies. Gender in
Management: An International Journal, 31(2), 97-113.
Nguyen, H., & Liu, M. H. (2014). Effective derivative hedging and initial public offering long‐
run performance. Accounting & Finance, 54(4), 1263-1294.
O'Connor Keefe, M. (2014). Does the effect of revealed private information on initial public
offering (IPO) first trading day return differ by IPO market heat?. Accounting &
Finance, 54(3), 921-964.

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Plummer, L. A., Allison, T. H., & Connelly, B. L. (2016). Better together? Signaling interactions
in new venture pursuit of initial external capital. Academy of Management Journal, 59(5),
1585-1604.
Saboo, A. R., Kumar, V., & Anand, A. (2017). Assessing the impact of customer concentration
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Sg.finance.yahoo.com (2019). BHP Group. Retrieved on 14 August 2019 retrieved from
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Terjesen, S., Bosma, N., & Stam, E. (2016). Advancing public policy for high‐growth, female,
and social entrepreneurs. Public Administration Review, 76(2), 230-239.
Wang, T., & Song, M. (2016). Are founder directors detrimental to new ventures at initial public
offering?. Journal of Management, 42(3), 644-670.
Yaakob, H., & Halim, M. N. (2016). Initial public offering underpricing performance in
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