Deakin Graduate School of Business
MPF753 – Finance: Assignment 2- Trimester 2, 2013
General Information
1. This assignment makes up 30% of your total assessment in this unit.
2. Due Date: Monday 16
th
September 2013 (Week 9) no later than 11:59 pm (AEST). A
request for a time extension must be made in writing (which must include documentary
evidence such as medical certificate) addressed to the Assignment Coordinator
r.xiao@deakin.edu.au at least one day before the due date. Assignments submitted after
the deadline without a time extension being approved by the Assignment Coordinator will
not be marked.
3. This assignment can be completed individually or in a group of two. Students must complete
both Part A and B. Students are strongly encouraged to complete the assignment as a group
assignment. However, MPF953 students must complete this assignment as an individual
assignment. The first page of your assignment report must clearly show the full name and
student ID number of both group members.
4. The word limit is 2500 words, with 1500 words for part A and 1000 words for part B
(excluding tables, figures, appendices and reference list).
5. Marked assignment report and feedback will be returned to you within 15 working days of
the due date or extended due date of the assignment if the time extension has been
granted.
Group Submission: As a group of ‘One’ or ‘Two’ students via CloudDeakin
1. Your assignment must be lodged electronically via the CloudDeakin site for this Unit. DO
NOT submit your assignment by email or as a hard copy.
2. We will add a link called 'Groups' to the navigation bar on CloudDeakin after 18
th
August
2013. Please use this link to register your assignment group before 9
th
September 2013 6pm
(AEST) - You can register in a group of 1 or 2 students. Marks may be deducted if you fail to
register by 9
th
September 2013 6pm.
3. Please coordinate your enrolment with your group partner; if you make a mistake or if you
wish to change the group please email the details (e.g., name, student ID number, wrongly
registered group number) to Dr Robert Xiao: r.xiao@deakin.edu.au
4. Please do not join someone’s group unless you have consent to do so – You will be removed
from a group at the request of the other student!
How to submit your file
1. Please ensure that you name your WORD document with your student number, if you
submit in a group, please name it with both student numbers, e.g. 1234508_1234509.doc or
1234566.doc
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2. Ensure to submit ONE WORD file only, workings in excels is to be embedded into the word
file (embedded means the marker can click on your table which will then open in excel, so
we can check your workings). Do not submit separate files.
3. You must include a comprehensive list of references for both your data sources as well as
citations. You are required to use either Harvard system or APA system for referencing.
4. There is no official assignment cover sheet. Before submitting your assignment report,
please read the plagiarism and collusion declaration section in the assignment submission
dropbox.
5. Also, please be aware that the Turnitin function has been added to your submission, once
you upload your paper as a submission, you can access the originality report. You will be able
to still make changes to the document if needs be; as the dropbox accepts further
submission until the due date (each attempt overrides previous attempts).
6. All submissions will be checked for plagiarism using Turnitin© software. If plagiarism is
suspected, the assignment will automatically be referred to the Faculty’s Academic Progress
Committee.
Deakin Graduate Learning Outcomes
1. Discipline-specific knowledge and capabilities: appropriate to the level of study related to a
discipline or profession.
2. Digital literacy: using technologies to find, use and disseminate information.
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PART A: Case study – IPO Under-Pricing? (6 + 4 + 6 + 2 = 18 marks)
A written report limited to a maximum of 1500 words (excluding tables, figures and references)
Background
Facebook’s IPO (Initial public offering) is one of the world’s largest initial stock offerings, raising $16
billion for the company. Facebook made its stock market debut on May 18, 2012 with an initial
offering price of $38 per share, but closed at $38.23, a slight 0.61 per cent up (Associated Press,
2012). The typical big first-day pop in the share price seen in other technology companies’ IPOs that
many investors had expected did not materialise. Instead, its stock price has tumbled since. On the
close of its 12th trading days, Facebook’s stock price fell to $25.87, a drop of 31.9% from its IPO
price. The highly anticipated IPO has turned into a debacle, sparking fury among investors, which led
to the filing of a number of lawsuits.
Questions
Lee Reacher, the CEO of Goo-Du Company, a private internet-related service company, is planning to
raise equity through an initial public offering. Lee is going to propose the plan to the major
shareholders and is worried about the resistance from the shareholders due to the last year
Facebook’s IPO debacle. He remembered from his MBA finance course that many IPOs in the US
were issued at prices substantially below the first day closing market prices. However, he was not
sure whether the short-run IPO under-pricing phenomenon exists in Australia stock market. Lee
asked you, the chief financial analyst, to investigate and prepare a report on the following issues.
1. Short-run IPO under-pricing is a well-known phenomenon exists in the US stock market. Is this
phenomenon unique to the US IPO firms only? In other words, does this phenomenon exist in
the Australian stock market? To answer this question, you are required to investigate the
short-run IPO performance in the Australia stock market. To measure the short-run IPO
performance, you should calculate and analyse the initial return of IPOs that were listed on
Australian Securities Exchange (ASX) from Jan 1, 2011 to May 31, 2011 and remain listed up
until its 2-year anniversary. The initial return (Ritter, 1991, p.7) equals:
[(The last trading price at the end of the first day of trading -initial offering price)/ initial
offering price] * 100.
Download the list of IPO firms with their issue price and the first trading day closing price from
Morningstar DatAnalysis. The initial offering price is called the issue price in DatAnalysis.
Please make sure that you select the adjusted price for the closing price.
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Critically analyse the results of your calculation using the entire sample and describe the
insights that could be gained from the calculation. For instance, you could describe the results
of the analysis using simple descriptive statistics such as mean, median & etc. or frequency
distribution.
Next, categorise your data/calculations into groups using 3 variables such as industry and
describe what additional insights you could gain from the analysis. You must decide on your
own the grouping variables to be used and provide the justification(s) for your selection. Also,
list any assumptions made in the analysis. (6 marks)
2. How do the IPO firms perform after the IPO? Examine the performance of IPO firms analysed
in Question (1) 2 years after they were listed on ASX using the 2-year holding period return.
Compare and contrast the 2-year performance with the initial return based on the grouping
variables chosen in Question (1). The formula for 2 year holding period return (Ritter, 1991,
p.14) is
100 return period holding 2
2
× ?
?
?
?
?
? -
= -
t
t
P
P P
year
P2 = the adjusted closing price on the 2-year anniversary. If the first trading day is June 1, 2010,
then the 2-year anniversary is June 1, 2012; if the 2-year anniversary is a non-trading day, then
use the adjusted closing price of the trading day immediately prior to the 2-year anniversary; If
the company is suspended from trading on the 2-year anniversary, use the available adjusted
closing price,
Pt
= the adjusted closing market price on the first day of trading, (4 marks)
3. Select and discuss 2 theories/propositions in your opinion that provide the most plausible
explanations for the occurrence of short-run IPO under-pricing in the US or Australian stock
market. Perform some background research and use the findings to justify your selection. You
are expected to use at least three academic references for this task. You may use articles from
academic journals or textbooks but Not Wikipedia or other non-academic Internet websites.
(6 marks)
4. Please note that 2 marks are allocated for referencing. (2 marks)
(6 + 4 + 6 + 2 = 18 marks)
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Part B: Valuation: Dividend Discount Model (1 + 3 + 1 + 2 + 4 + 1 = 12 marks)
A written report limited to a maximum of 1000 words (excluding tables, figures and references)
In Part B of this assignment you are required to evaluate the theoretical price of the share of a
company that is currently traded on the Australian stock market and has been in operation and
paying dividends for at least seven years. You are required to apply the Dividend Discount Model to
estimate the value of the share and then write up a reconciliation report explaining any observed
differences between the current traded stock price and the estimated value.
Having selected your company, you will then need to download the past seven years of dividend
payment history. If your chosen company has paid dividends twice in a year (interim and final) then
the aggregate dividend paid for the year must be obtained. If interim dividends have been
considered then they have to be appropriately annualized. Using the past dividend information you
will then compute a dividend growth rate applying an appropriate estimation technique. This
growth rate will be used as a “proxy” for the constant growth rate in the “Dividend Discount
Model”(the underlying theory will be covered in Week 2/3 lectures). How you estimate the growth
rate is your choice. You must however clearly explain and justified whatever estimation technique
you adopt. For example, you may want to try out the “= FORECAST ( ... )” function in MS Excel in
order to compute the next period’s dividend from the last seven years’ dividend payout history for
your chosen company. Then the proxy constant growth rate term is (Next period’s dividend –
Current dividend)/Current dividend. However this is only a suggestion – you are strongly encouraged
to explore other methods for estimating the growth rate. You must justify your estimation
procedure for the growth rate.
You will also need to apply a comparative earnings methodology to determine the cost of equity –
another key input variable that is needed within the Dividend Discount Model (DDM). You’ll need to
collate a sample set that containing around ten different companies from the same or a very closely
related sector of your selected company. After collating the sample set, you will need to obtain the
most recent available financial information for each of these companies in the sample set. Again,
you can access company financial data from Morningstar DatAnalysis, which can be accessed from
the Deakin Library. Using the published financial statements information, you will then need to
calculate the returns on equity (ROE) of each of these companies as a percentage equal to the
reported net earnings after tax divided by the total shareholders’ equity. An arithmetic average of
these ROEs of your sample set will yield a reasonable estimate of the required cost of equity that can
then be used within the DDM in order to calculate the theoretical share price.
What you need to submit for Part B:
A written report limited to a maximum of 1000 words (excluding tables, figures and references) that
clearly explains your estimation procedures. This must include a description and justification of your
estimation technique that you used to obtain (1) the proxy constant growth rate and (2) the proxy
cost of equity. You must also state all your assumptions.
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Part B will be assessed based on the following criteria:
(1) The names and last seven years’ dividend payout data of the company that you chose to
evaluate. [Remember to cite all sources for your data] (1 mark)
(2) Full details (including logical justification) of the estimation method used to compute the proxy
value for the constant growth rate term. (3 marks)
(3) Full names and latest reported net earnings of all the companies from the same or a closely
related sector in your sample set that you collate for the purpose of establishing a reasonable cost of
equity. [Remember to cite all sources for your data]. (1 mark)
(4) The calculation of the individual ROEs for the companies in the sample set plus the calculation of
the estimated cost of equity as the arithmetic average of the individual ROEs for the companies in
the sample, and (2 marks)
(5) A “reconciliation report” comparing & contrasting the theoretical share price obtained using
Dividend Discount Model with the actual market price of your chosen company and providing an
explanation for any observed differences. (4 marks)
(6) Please note that 1 mark is allocated for referencing. (1 mark)
(1 + 3 + 1 + 2 + 4 + 1 = 12 marks)
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Useful resources
You will need to read and understand chapters 9, 10 and 13 of your textbook. You are expected to
do research outside of lecture time on your own using library/online sources, process the
information gathered and write an organised well-thought out response to the assignment
questions. The following are some resources that you may find useful:
1. ASX (2011). IPO the road to growth and opportunity. Data accessed July 16
th
, 2013, from
http://www.asxgroup.com.au/media/PDFs/asx_ipo_brochure.pdf
2. Ritter, J. R. (1991). The long-run performance of initial public offerings. The Journal of Finance
46, 3-27.
3. Black, K. (2011). Business statistics: For contemporary decision making, 7edn, John Wiley,
chapters 2 & 3, Deakin University Library e-book.
4. http://au.finance.yahoo.com
5. http://www.asx.com.au/asx/markets/dividends.do
6. http://efinance.org.cn/cn/fm/The%20Dividend%20Discount%20Model%20A%20Primer.pdf
The list of IPO firms, initial offering price, historical closing prices, dividend payment history and all
other relevant financial information should be obtained from Morningstar DatAnalysis, which is the
library database that can be accessed via the Deakin Library website. Instructions on how to obtain
the information from DatAnalysis will be given in separate PowerPoint slides. Embed in your report
the Excel spreadsheet containing the data you will use for the calculation in Part A and Part B.
Referencing is very important. This can be time consuming and tedious. Ensure that you do not
underestimate the amount of time that you will need to devote to this task. You are required to use
either Harvard system or APA system for referencing. Please refer to ‘Guide to assignment writing
and referencing.pdf’ for the proper way to write references. A copy of the guide can be obtained
from http://www.deakin.edu.au/current-students/assets/resources/study-support/studyskills/assign-ref.pdf
References
1. Ritter, J. R. (1991). The long-run performance of initial public offerings. The Journal of Finance
46, 3-27.
2. Associated Press. (2012, May 18). Facebook’s IPO: Price flat on first trading day, The Herald,
from http://www.heraldnet.com/article/20120518/BIZ/120519770/1013/BIZ05.