Department of Finance
MPF753 – Finance: Assignment 2 – Trimester 1, 2016
General Information
1. This assignment makes up 30% of your total assessment in this unit.
2. Due Date: Monday, 2 May 2016 (Week 8), no later than 5:59 pm (AEST). A request for a time extension must be made in writing to the Unit Chair, Dr Mong Shan Ee (mong.e@deakin.edu.au) at least one day before the due date. This request must include documentary evidence, such as medical certificate.
Please note: since students will have several weeks to complete this assignment and are expected to make good use of this time, being unfit on the due date or just one or two days prior to the due date, may not be an acceptable ground to get an extension. Assignments submitted after the deadline without an extension approved by the Unit Chair will not be marked.
3. This assignment must be completed in a group of two (or individually, if prior permission has been obtained from the Unit Chair).
• Please note that If you are a student enrolling in MBA and related courses (M701, M601, M501, D713, M708, M741, M701V, D701, D704, D720), please pair up with another student enrolling in the courses listed above.
• For students in ALL OTHER COURSES (e.g., MBA(I), MCom, MPA, etc), please pair up with another student enrolling in ALL OTHER COURSES except those listed above.
• The rationale for the separate group pair up for MBA students is that they have considerable managerial work experience and, therefore, their learning experience is different. Hence, the MBA course team has determined that the MBA student cohort should work together in student groups. Students in ALL OTHER COURSES can work in groups across courses.
MPF953 students must make an individual submission. For all students, the first page of your assignment report must clearly show the full names and student ID numbers of both group members.
4. The word limit is 2,500 words (excluding tables, figures, appendices and reference list).
5. Marked assignments and feedback will be returned within 15 working days (23 May 2016) of the due date or extended due date of the assignment if an extension was granted.
Assignment Submission via the MPF753 CloudDeakin site
1. Your assignment must be submitted via the MPF753 CloudDeakin site.
Please DO NOT submit your assignment by email or send us a hard copy under any circumstances.
2. Please sign-up to a group via CloudDeakin from 18 April 2016 to 27 April 2016, 5:59pm (AEST). Please click on the “More” tab and then select “Groups”. If you are an MBA student, please select “Cluster A, MBA only” to sign-up to a group. For students in ALL other courses, e.g., MBA(I), MCom, etc. please select “Cluster B, ALL OTHER COURSES” to sign-up to a group. You can register as a group of 1 or 2 students. Marks may be deducted if you fail to register by 27 April 2016, 6pm.
3. Make sure you and your group partner register correctly. If you make a mistake or wish to change the group, then please email the details (e.g., name, student ID number, wrongly registered group number) to Dr Mong Shan Ee (mong.e@deakin.edu.au).
4. Do not join someone’s group unless you have prior permission to do so. You will be removed from a group at the request of the other student!
How to submit your file
1. Name your Microsoft (MS) Word document using your student number(s). For example, 1234566.doc or – if your group has two members – 1234508_1234509.doc
2. Submit your assignment as a SINGLE MS Word document only (no PDFs or other file formats). Workings in Excel must 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 use the Harvard style of referencing style, as set out in the Deakin guide to Harvard referencing, and include a comprehensive list of references for both your data sources and in-text citations.
4. There is no official assignment cover sheet. Before submitting your assignment report, read the plagiarism and collusion declaration section in the assignment submission dropbox.
5. All submissions will be checked for potential plagiarism using Turnitin© software. If plagiarism is suspected, the assignment will automatically be referred to the Faculty’s Academic Progress Committee. Turnitin: once you upload your paper as a submission, you can access the originality report. Use the feedback to revise and improve your document. You can still make changes to the document, as the dropbox accepts further submissions until the due date (each attempt overrides previous attempts).
6. When you make the submission of Assignment 2 report at CloudDeakin, you will be asked to confirm the following declaration relating to academic honesty:
“By clicking the SUBMIT button above or below, you are declaring that the attached work is entirely your own (or where submitted to meet the requirements of an approved group assignment, is the work of the group), except where material quoted or paraphrased is acknowledged in the text. You are also declaring that it has not been submitted for assessment in any unit or course.”
Deakin Graduate Learning Outcomes (GLOs)
1. Discipline-specific knowledge and capabilities (GLO 1): appropriate to the level of study related to a discipline or profession.
2. Digital literacy (GLO 3): using technologies to find, use and disseminate information.
Case study – IPO Under-Pricing (30 marks: 13 + 5 + 10 + 2)
A written report of 2,500 words max. (excluding tables, figures and references)
Background
The following is an excerpt from the Deloitte 2015 IPO market update (Deloitte 2015, p. 4):
Despite the recent turbulence in global markets, there have been a total of 48 listings (36 in 2014) up to the date of this report, raising $4.4bn and representing a total market capitalisation of $8.4bn. Technology and financial services listings continue to drive investor appetite and represent 50% of all 2015 listings.
The IPO market continues to significantly outperform the ASX 200, demonstrated further by strong growth of stocks including Eclipx (34.8%) and the recent listing of Pepper Group (29.2%), amongst others.
Of the 48 listings in 2015, 21 had a market capitalisation in excess of $75m, generating an average share price performance gain of 7.2%. In comparison, the ASX 200 has continued to be subject to market volatility on the back of international uncertainty, dropping 4.1% over the period to 21 August 2015.
Questions
Inspired by 2015 IPOs performance, Jason Ryder, the CEO of Dynamic Mining, a gold private exploration and mining company, is planning to raise equity through an initial public offering. Jason is going to propose the plan to the company’s major shareholders, but worries about resistance from some of the shareholders, who are known to be conservative. 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 underpricing phenomenon exists in the Australian stock market. Jason asks you, the Chief Financial Analyst (CFA), to investigate and prepare a report on the following issues.
1. Calculate initial return, analyse and interpret the Australian IPO market
Short-run IPO under-pricing is a well-known phenomenon in the US stock market. But is this phenomenon unique to US IPO firms only? In other words, does this phenomenon perhaps also exist in the Australian stock market? To answer this question, you need to investigate the shortrun IPO performance in the Australia stock market. To measure the short-run IPO performance, you will have to calculate and analyse the initial return of IPOs that were listed on the Australian Securities Exchange (ASX) from 1 September 2013 to 31 December 2013. The initial return (Ritter 1991, p. 7) equals:
[(The first trading day closing price – issue price) / issue price] * 100.
Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis Premium. Remove those IPOs without issue price in the spreadsheet downloaded from DatAnalysis. Also, make sure you select the adjusted price for the closing price. Describe the sample selection process. You should list any assumptions made during the sample selection process.
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 should describe the results of the analysis using simple descriptive statistics, such as mean, median, minimum, maximum, etc., or the frequency distribution.
Next, categorise your data/calculations into groups using two variables (e.g., industry sector) and describe what additional insights you could gain from the analysis. You will decide which grouping variables you will use and provide justification(s) for your selection. You should also list any assumptions made in the analysis.
Wherever appropriate, the summary of your analysis and/or results (e.g., in a brief table, chart or graph) should be presented in the main text of your report. However, the data, detailed calculation/analysis and results should be presented in the Excel spreadsheet, which must be embedded in the Appendix section of your report. Note that 1 mark is allocated for organising and presenting the calculation/analysis and results in the embedded Excel Spreadsheet and report. In addition, you must properly reference (Harvard style) all sources of information used.
(13 marks)
2. Describe a reason for short-run IPO under-pricing
Select and discuss one theory/proposition that in your opinion provides the most plausible explanation for the occurrence of short-run IPO under-pricing in the US and/or Australian stock market. Perform some background research and use the findings to justify your selection. You are expected to use at least two academic references for this task. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic
Internet websites. You must properly reference (Harvard style) all sources of information used.
(5 marks)
3. Describe and discuss a study investigating the short-run IPO under-pricing in an emerging market
Pick one stock market from the selected emerging markets . Perform some background research and then describe one study that empirically investigates the existence of short-term IPO under-pricing in the stock market you have chosen. To answer this question, you are expected to describe the study (including the research methodology used to examine the existence of short-term IPO under-pricing and the factors explaining the degree of under-pricing in the selected stock market) and the empirical results on the degree and factors explaining the short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of IPO under-pricing in relation to the theory discussed in Question (2). In attempting this task, you are expected to use at least three academic references. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic
Internet websites. You must properly reference (Harvard style) all sources of information used.
(10 marks)
4. Please note: 2 marks are allocated for referencing. (2 marks)
(13 + 5 + 10 + 2 = 30 marks)
Useful resources and referencing
You should read and understand Chapters 5 and 12 of your textbook and Topic 3 lecture slides. You are expected to do research outside of your lecture time, using library/online sources, process the information gathered, and write an organised, well-thought-out response to the assignment questions. Here are some useful resources:
1. ASX 2014, IPO the road to growth and opportunity, retrieved 25 January 2016, http://www.asx.com.au/documents/products/ASX_IPO_Brochure.pdf .
2. Deloitte 2015, Deloitte 2015 IPO report, retrieved 25 January 2016,
http://www2.deloitte.com/au/en/pages/finance/articles/deloitte-2015-iporeport.html?utm_source=social&utm_medium=social&utm_campaign=sl_fas_2015_ipo_r eport_15_03_10 .
3. Ritter, JR 1991, ‘The long-run performance of initial public offerings’, The Journal of Finance, vol. 46, no. 1, pp. 3–27.
4. Chapters 2 and 3 from: Black, K 2011, Business statistics: for contemporary decision making, 8th edn, John Wiley, Hoboken. Available as a Deakin University Library e-book.
A number of resources relevant to Assignment 2 can be found on Library Resources Guides website (http://deakin.libguides.com/content.php?pid=5288&sid=3586901) and the Padlet website (http://padlet.com/buslaw221/mpf753) developed specifically for MPF753 Finance.
The list of IPO firms, initial offering price, historical closing prices, and all other relevant financial information should be obtained from Morningstar DatAnalysis Premium – a library database that can be accessed via the Deakin Library website. Instructions on how to obtain the information from DatAnalysis are given in a separate instruction document and short video clips (posted on the MPF753 Finance Library Resources Guide and MPF753 Padlet website), and will be discussed during the Week 3 Lecture (will be recorded). You are strongly advised to attend (watch/listen) that lecture (recorded lecture and video clips) before you start to work on your assignment. In your report, embed the Excel spreadsheet containing the data you will use for the calculations.
Good referencing and carefully checking all your references are important. Make sure you leave enough time to do this. For this assignment, you must use the Harvard referencing style, as described in the Deakin guide to referencing. Click on the ‘Harvard’ tile’, top left, to access the Harvard guide online or download a PDF copy. The Deakin guide to referencing also provides useful information on academic integrity, general referencing principles and how to integrate your sources into your writing through summarising, paraphrasing, etc.