Managing Finance: FINA6000 Assignment Analyzing IPO Performance

This assignment analyzes the financial performance of three Australian companies—Dick Smith, Virtus Health, and Meridien Energy—following their Initial Public Offerings (IPOs). The study examines the benefits of IPOs, such as capital raising, and evaluates the impact on share prices, including instances of underpricing and overpricing. It explores the cyclical nature of IPOs and the factors influencing investment decisions, referencing data from the Australian Stock Exchange, annual reports, and analyst reports. The report assesses the use of IPO funds for investment projects and working capital, and it also discusses the dividend yield for investors, providing a comprehensive overview of IPO performance and its implications for financial management. The analysis covers the performance of these companies over a period of time, providing insights into the long-term effects of IPOs.

Running head: MANAGING FINANCE
Managing Finance
Name of the student:
Name of the university:
Author Note:

1MANAGING FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Answer to Question (A).........................................................................................................3
Answer to Question (B).........................................................................................................3
Answer to Question (C).........................................................................................................4
Answer to Question (D).........................................................................................................5
Answer to Question (E)..........................................................................................................6
Answer to Question (F)..........................................................................................................8
Conclusion..................................................................................................................................9

2MANAGING FINANCE
Introduction:
The aim of the assignment deals with the three chosen companies which are the Dick
Smith, Virtus Health and Meridien Energy which is listed in the Australian Stock Exchange.
The financial performance of all the three mentioned companies have been evaluated along
with the effect in the share price of the business through initial public offering. The ups and
downs in the share price of all the three companies have been depicted in the conducted
study. The effect of underpricing and overpricing IPO policy of all the three firms have been
provided in the conducted study.

3MANAGING FINANCE
Discussion:
Answer to Question (A)
The three chosen companies in the assignment are the Dick Smith, Virtus Health and
Meridien Energy. There are various benefits of the company by issuing the initial public
offering in order to raise capital quickly by reaching large number of investors in the market.
This further helps the business of the company in need to further expand the current business
by effectively utilizing the total money raised by the business in terms of capital1.
From the above evaluation it can be said that in case of Dick Smith on the first day of
trading, the company incurred a loss of about 2%. But in case of the Virtus Health and
Meridian Energy, both the company has incurred profit of about 10% and 6%. The above
evaluation estimates that initiative of initial public offering for Virtus Health and Meridian
energy will be benefited from the offering as it is showing positive return out of the first day
of trading in the market. It is analyzed that the funds raised through the initial public offering
will further increase the overall working capital of both the firms2.
Answer to Question (B)
In order to raise funds, initial public offering is a very costly way to in order to raise
the long term finance for corporation. Generally company needs to offer securities to the
1 Barr, Margaret J., and George S. McClellan. Budgets and financial management in higher education. John
Wiley & Sons, 2018.
2 Alon, Ilan, and B. Elango. "Franchising and initial public offering: a signaling perspective." International
Journal of Retail & Distribution Management 46.11/12 (2018): 1193-1208.

4MANAGING FINANCE
public with the help of the initial public offering. There are certain rules and regulation
attached to the Australian Stock Exchange in order to prepare the information memorandum.
In order to raise funds in the process of initial public offering the company needs to incur
certain fee. Hence it can be said that in order to raise funds the cost incurred in that case is
generally high. There are certain benefits of issuing shares on the basis of initial public
offering. The company needs to have some of the minimum requirements in order to raise
funds through the initial public offering3.
Raising funds through the process of initial public offering is high based on certain
policies of the firm. Generally the company issues equity shares capital by the process of
issuing new shares to the public. This will definitely impact the cost of equity of the firm
which is the return of the firm out of the total amount of capital invested4.
Answer to Question (C)
The Dick Smith is a retailing company and as per the issuing price and closing price
in the first day of trading on the Australian Stock Exchange it is estimated that initial public
offering of the company is currently overpriced as the current financial, performance of the
company is satisfactory. The company further thinks that the company will further achieve
potential growth in the company future that’s why the offer price of Dick Smith is currently
overpriced. This is reason behind the negative return out of the first day of trading as Dick
Smith is currently a growing company in the retail industry5.
3 Al-Malkawi, Husam-Aldin Nizar, and Rekha Pillai. "Analyzing financial performance by integrating
conventional governance mechanisms into the GCC Islamic banking framework." Managerial Finance 44.5
(2018): 604-623.
4 Boone, Audra L., Ioannis V. Floros, and Shane A. Johnson. "Redacting proprietary information at the initial
public offering." Journal of Financial Economics 120.1 (2016): 102-123.
5 Renz, David O. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons,
2016.

5MANAGING FINANCE
The Virtus Health deals with the healthcare equipment’s and as per the current
performance of the company, Virtus health goes for the underpricing in the initial public
offering with the strategy to attract the potential investors in the market in order to buy the
shares of Virtus Health. The company issues the share price at a discount so that the investors
are benefited from such kind of investments. The extent of underpricing of the company
varies from industry to industry. Initially underpricing the initial public offering generally
increases the stock value of the company in that case. As the current financial position of the
company is good which further makes the upper level management of the company quite
confident to issue the initial public offer at a discount6.
The Meridien Energy deals with the utilities and as per the current financial
performance of the company, the company also went for underpricing in the initial public
offering in order to attract the potential investors in the market. Further this would help the
company in order to raise more funds from the market. Raising capital from the market and
further investing it will automatically increase the overall value of the company. The current
financing status is goods and applying the strategy of underpricing will automatically
enhance the overall financial position of the business7.
Answer to Question (D)
The initial public offering activity in an economy is cyclical and is further a function
of the market condition. The cyclical stocks are those stocks which moves up or down
depending on the current situation of the company. These are the IPO stocks which are traded
6 Wang, Zhihong, and Joseph Sarkis. "Corporate social responsibility governance, outcomes, and financial
performance." Journal of Cleaner Production 162 (2017): 1607-1616.
7 Flammer, Caroline. "Does corporate social responsibility lead to superior financial performance? A regression
discontinuity approach." Management Science 61.11 (2015): 2549-2568.

6MANAGING FINANCE
heavily in the market as the potential investors in this case tries to buy and sell the shares in
the market8.
The change in the IPO over the last seven to eight years which means that the
underpricing initiative of the company is generally increasing in this case. Most of the firm in
case of the initial public offering tends to adopt the underpricing methods. This is the method
which is adopted by the most of the firms whose current financial position is good and further
to expand the current situation of the business, the firms adopts the potential strategy of
underpricing9.
The decision is based on the overall objectives and the current position of the
business. If the proportion of the IPO which represent the risky stocks increases in that case
and there should be greater average underpricing. There are certain risk associated with the
valuation of the company along with the underpricing of the shares in the market. There are
minor changes in the variation of the underpricing overtime if there are stationary risk return
relation10.
Answer to Question (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
8 McKinney, Jerome B. Effective financial management in public and nonprofit agencies. ABC-CLIO, 2015.
9 Finkler, Steven A., Daniel L. Smith, and Thad D. Calabrese. Financial management for public, health, and
not-for-profit organizations. CQ Press, 2018.
10 Zietlow, John, et al. Financial management for nonprofit organizations: policies and practices. John Wiley &
Sons, 2018.

7MANAGING FINANCE
increase shareholder value11. As per the current economic situation of Australia, the share
price of the company will gradually increase and further the potential investors in this case
will be highly motivated in order to invest in the market. Low price in IPO will also attract
the potential investors in the market which will automatically increase the value of the shares
in the market.
From the above evaluation in the share prices of the three companies which are the
Dick Smith, Virtus Health and Meridien Energy it can be interpreted that on the basis of the
five year share price after the initial public offering the share value of the company is down12.
This means that the strategies related to the management of the company didn’t worked as
per the plans of overpricing the IPO. At a certain point after year 2015 the share price the
company became stagnant13. This further indicates that the financial performance has been
decreased year by year which resulted in such poor value in the shares of the company. This
further means that the strategy initiated at the time of IPO didn’t worked for the company14.
The share price of Virtus health also decreased gradually which means that the
investment made by the company is not effective and further the company needs to work on
11 Rivera, Juana M., Maria J. Muñoz, and Jose M. Moneva. "Revisiting the relationship between corporate
stakeholder commitment and social and financial performance." Sustainable Development 25.6 (2017): 482-494.
12 Qiu, Yan, Amama Shaukat, and Rajesh Tharyan. "Environmental and social disclosures: Link with corporate
financial performance." The British Accounting Review 48.1 (2016): 102-116.
13 Shette, Rachappa, and Sudershan Kuntluru. "Readability of Initial Public Offering Prospectus and Earnings
Performance." International Journal of Economics and Financial Issues 8.3 (2018): 68.
14 O’Neill, Peter, Amrik Sohal, and Chih Wei Teng. "Quality management approaches and their impact on firms
׳ financial performance–An Australian study." International Journal of Production Economics 171 (2016): 381-
393.

8MANAGING FINANCE
the strategies in order to improve the value of the shares of the company. Certain changes in
the management system and further effective investment strategies will boost the overall
value of the shares15.
The share price of the Meridien Energy is constantly increasing after the IPO of the
company. This means that the current performance of the company is good and further as per
detailed analysis it is found that the financial performance of Meridien Energy is gradually
improving. Gradual increase in the share price of the company will automatically attract the
potential investors of the company. Hence the business performance in that case is gradually
increasing16.
Answer to Question (F)
On the contrary to the above point, it can be said that the dividend yield by the
investors will be extra income earned by the investors from the market. Hence in case of the
Meridien Energy, the potential investors will be able to earn a lot through investing as the
dividend yield of the company will be high as the current financial performance of the
company is satisfactory. This will automatically help the company to drag the potential
investors in the market which will further help the company to raise funds17.
15 Flammer, Caroline. "Does corporate social responsibility lead to superior financial performance? A regression
discontinuity approach." Management Science 61.11 (2015): 2549-2568.
16 Rodriguez-Fernandez, Mercedes. "Social responsibility and financial performance: The role of good corporate
governance." BRQ Business Research Quarterly 19.2 (2016): 137-151.
17 McDonald, Robert E., and John Masselli. "Mission-Based/Non-Financial Performance Metrics for Nonprofit
Organizations: Policy and Practice: An Abstract." Academy of Marketing Science World Marketing Congress.
Springer, Cham, 2018.

9MANAGING FINANCE
Conclusion
From the above discussion it can be concluded that there are certain benefits of the
IPO of the company as well as disadvantages. The management of the company must take
certain initiatives in order to increase the potential business of the company. As per the
conducted analysis it is found that the Meridien Energy is performing well. The business
performance of Dick Smith and Virtus Health is below average and here the management
system of the company in that case needs to take certain measures to improve the current
business status. The effect of underpricing and the overpricing of IPO in the market have
been duly represented in the conducted study.

10MANAGING FINANCE
References
Al-Malkawi, Husam-Aldin Nizar, and Rekha Pillai. "Analyzing financial performance by
integrating conventional governance mechanisms into the GCC Islamic banking
framework." Managerial Finance 44.5 (2018): 604-623.
Alon, Ilan, and B. Elango. "Franchising and initial public offering: a signaling
perspective." International Journal of Retail & Distribution Management 46.11/12 (2018):
1193-1208.
Barr, Margaret J., and George S. McClellan. Budgets and financial management in higher
education. John Wiley & Sons, 2018.
Boone, Audra L., Ioannis V. Floros, and Shane A. Johnson. "Redacting proprietary
information at the initial public offering." Journal of Financial Economics 120.1 (2016): 102-
123.
Finkler, Steven A., Daniel L. Smith, and Thad D. Calabrese. Financial management for
public, health, and not-for-profit organizations. CQ Press, 2018.
Flammer, Caroline. "Does corporate social responsibility lead to superior financial
performance? A regression discontinuity approach." Management Science 61.11 (2015):
2549-2568.
McDonald, Robert E., and John Masselli. "Mission-Based/Non-Financial Performance
Metrics for Nonprofit Organizations: Policy and Practice: An Abstract." Academy of
Marketing Science World Marketing Congress. Springer, Cham, 2018.
McKinney, Jerome B. Effective financial management in public and nonprofit agencies.
ABC-CLIO, 2015.

11MANAGING FINANCE
O’Neill, Peter, Amrik Sohal, and Chih Wei Teng. "Quality management approaches and their
impact on firms׳ financial performance–An Australian study." International Journal of
Production Economics 171 (2016): 381-393.
Qiu, Yan, Amama Shaukat, and Rajesh Tharyan. "Environmental and social disclosures: Link
with corporate financial performance." The British Accounting Review 48.1 (2016): 102-116.
Renz, David O. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons, 2016.
Rivera, Juana M., Maria J. Muñoz, and Jose M. Moneva. "Revisiting the relationship between
corporate stakeholder commitment and social and financial performance." Sustainable
Development 25.6 (2017): 482-494.
Rodriguez-Fernandez, Mercedes. "Social responsibility and financial performance: The role
of good corporate governance." BRQ Business Research Quarterly 19.2 (2016): 137-151.
Shette, Rachappa, and Sudershan Kuntluru. "Readability of Initial Public Offering Prospectus
and Earnings Performance." International Journal of Economics and Financial Issues 8.3
(2018): 68.
Wang, Zhihong, and Joseph Sarkis. "Corporate social responsibility governance, outcomes,
and financial performance." Journal of Cleaner Production 162 (2017): 1607-1616.
Zietlow, John, et al. Financial management for nonprofit organizations: policies and
practices. John Wiley & Sons, 2018.