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Analysis of IPO Market of Australia

Question:

Discuss about the Financial Analysis of Dynamic Investment Ltd.

The main objective of this report is to consider the professional guidelines with regard to the clients from the Dynamic Investment Ltd. who are concerned about investing into the firms of Australian IPO in the sector of , consumer discretionary and the information technology. In the year 2016, the market of Australian IPO achieved the highest position following the financial crisis that took place during 2009(Asker, 2014). It has been identified that during the past 36 years the organizations from Australia are listing their shares in the IPO market of Australia. As per the survey report various reasons are there, for instance, telecommunications, media and technology (TMT), better performance, industry growth and the growth in the healthcare industry that has shown 16.5% growth in this sector of market)(Dongxin, 2014). As the market is stable in growth prospect, the investors are interested in investing in this sector and therefore, demand for particular suggestions from Dynamic Investment Ltd. as per the research, the short-term performance of the US market is well known for this approach. Although the present scenario of the US IPO has a decreasing trend, the occurrence of reduction in price is not that is something new to this market. However, no such indication is there that Australian market will also experience the same thing like US IPO with regard to the concept of reduced price(Urusua, 2017).

Under this circumstance, it is crucial for the investors that they understand the IPO market of Australia in broader aspect and regarding how the return and risk relationship holds its position over the years. With regard to this, the return from the Australian Securities Exchange (ASX) from the period between 1st November and 31st December has been assesses by the financial advisor of Dynamic Investment Ltd ((Moorman, 2015).

The 1st part of this study will represent the calculation regarding the initial return and will analyse the IPO market of Australia in association with the calculation of return. The 2nd part of this study will analyse the long-term preference of the customer discretionary with regard to the holding period return over the two years period. Lastly, the report will investigate the reasons behind the price reduction of short-term IPO and the capability to contrast and compare the reasons through the result from the empirical study(Zervoudi, 2016).

In this section, the very first step is to evaluate the IPO sample obtained from the IPO market of Australia. To evaluate the listed IPOs during the chosen interval of time, the financial advisor has taken into account the premium database from Morningstar. At the time of analysing these IPOs, the IPOs have been excluded from the analysis, which do not have their issue price or which were suspended. After the exclusion, the financial advisor found total 29 organizations(Shi, 2016)

The following table is showing the descriptive statistics for the initial return:

Particulars

Initial return (%)

Mean

3.61

Median

0.00

Minimum

-22.02

Maximum

55.00

1st Quartile

-2.50

3rd Quartile

5.00

It can be identified from the above table that the value of the mean specified that the average of initial return is 3.61%. if the value of mean is only accounted for, then it can be stated that the IPO market from Australia was growing well over the short-term period. However, the minimum and maximum value as per the above table is revealing different outcomes. Moreover, from the minimum and maximum value, it can be argued that the performance of IPO over the short-term period significantly differs with various industries and the organizations(Sharma, 2017).The difference will be more obvious from the graph shown below:

Short-term Performance of Australian IPOs

In this section, the consumer discretionary is been selected to analyse the long-term performance of the IPO market of Australia. As the initial step, financial advisor has been recognized the holding price of the chosen organizations over the 2 years period from the date of issue. The outcomes of holding period over 2 year’s period are shown in the table below:

ASX Code

Name of the Company

Issue Price

Holding price over 2-year

Holding period return over 2-year (%)

APO

APN Outdoor Group Limited

2.55

5.26

106.27

SIO

Simonds Group Limited

1.78

0.42

-76.40

GFY

Godfreys Group Limited

2.75

1.02

-62.91

OML

Oohmedia Limited

1.93

4.7

143.52

LOV

Lovisa Holdings Limited

2

3.8

90.00

EVO

Evolve Education Group Limited

1

0

-100.00

SRF

Surfstitch Group Limited

1

0.185

-81.50

     

Average return

2.71%


It is identified from the above shown table that the industry is experiencing an average growth rate of 2.71% with regard to the holding period over the 2 years period from the date of issue of the individual organisation. The next step is to analyse the holding period return over the period of 2 years of the entire ordinary index. The table shown below are approving the same:

ASX Code

Name of the Company

Issue Price

Holding price over 2-year

Holding period return over 2-year (%)

AORD

All ordinaries

5190.7002

5560.399902

7.12

It can be seen from the above table that the holding period returnsfor all the ordinary index was measured through the adjusted closing value on 1st December and the adjusted closing value on their completion of 2nd year.

If the holding period return over the 2 years period from the consumer discretion is to be accounted for, then it can be stated that industry is growing rapidly as far as the long-term return from the IPO industry is to be considered. However, the holding period return over the 2 years period for the entire ordinary index has revealed the 7.12% return that is far better as compared to the holding period return of 2 years from the consumer discretionary. Therefore, it is obvious that the industry of consumer discretionary is under performing at present as compared to performance of the entireordinary index(Perera, 2016).

It is a fact that the investment decision for the specific industry or firm greatly depends on the risk taking approach of the investor. As most of the individual investors are reluctant on the risk approach, the difference in the return may have an impact on the opportunity of investment. However, in this study, the entire ordinary index is revealing that they are comparatively better as compared to the 2 years holding period return for the consumer discretionary. Therefore, even if the outcomes from the consumer discretionary has revealed better performance in the short-term, with regard to long-term period, the investor shall not take into account the consumer discretionary as the selected investment industry(Ball, 2012).

The main objective of this part of the study is to recognize one stock market from any nation like Sweden, Canada, Italy, Greece, France and Austria stock market. The financial advisor here selected the France stock market and analysed an empirical study and scrutinizes the presence of short-term IPO is under pricing throughout the stock market.

Analysis of the IPO firms enables better evaluation of the impact of corporate governance as the organization’s corporate governance are expected to be clearer as compared to the history of the firm. Analysis of the IPO firms may deliver clear test for the contingency perspective of the agencies. Further, the IPO firms are recognized by various big-block holders under the listing of retained equity. For instance, where the founders are primarily the largest stakeholders for the IPO, there also exist the assorted group of private equity investors who are specialized in the high potential – high growth ventures. Particularly, there are two different types of private equity investors under the IPO. They are: informal (BAs or business angels) or formal (VCs or venture capitalist), with distinct investment objectives. However, in the previous research on the governance, the variance among the Bas and VCs are not taken into account.

Long-term Performance of Consumer Discretionary Industry

This study analysed the performance of ownership concentration and difference kinds of investors for private equity firms that have undergone to IPOs recently in France. The common law nations are strong with regard to the legal protection for the minority share holders, whereas the protection of the investors is weakest under the French Civil law. Using various methodologies, the World Bank developed various indices for corporate governance that includes the Ease of shareholders Suits index that calculates the ability of the shareholders to strengthen the index for investor’s protection. As per this study, the Ease of shareholders strength and suits for the investor protection is only 5.0 and 5.3 in France as compared to 7.0 and 8.0 of UK(Wang, 2015)


The concentration of ownership represents the requirement but there does not exist the sufficient circumstances fro mitigating the conflicts among the agencies that are taking place within the IPO and it may require the assistance from the reputational considerations. Further, the investors from private equity like VCs are the bigger shareholders that are able to remove the risk of under pricing with their reputational capital. These facts led to the view that the presence of VC will mitigate the issue of under pricing of the IPO. Two crucial kinds of private equity investors are there who are majorly involved in the high potential – high growth governance that includes the ventures of IPOs: Bas and VCs

Involvement of various financiers in the entrepreneurial organizations is contingent upon the risk factors of the venture, for instance, the ownership of the founder, his experience and wide involvement. Thus, there exists the risk of endogeneity as the private equity firms are analysed to retain their ownership. Therefore, performance is the main function that is endogenously connected with the variable of ownership(Cirillo, 2015).

It is identified that the average price premium for 72% advises the investors to pay a considerable higher price for offer as compared to the book value of the equity and thus are optimistic regarding the growth prospects of the newly listed organizations. The average adjusted return on assets is equal to 0.5% that suggests that the performance of the IPO firms is not significantly different from the industry average.  On an average, the VCs and Bas owned the 8.3% and 4.3% out of the total equity from the IPO organizations. This is significantly below from the founder ownership of 39%. The value of the VC investments in UK during 2007 was equal to 1.69% of GDP as compared to only 0.66% in France. VCs in France are less likely to monitor the investees as well as independent as compared to their counterparts in UK. BAs in the UK are expected to form networks in association with BA networks in the UK representing 36% of all European BA networks.

It has been concluded from the study that there is a strong indication that the presence and the concentration of ownership for private equity investors can be used as a powerful tool within the corporate governance. Similarly, the various kinds of private equity investors can lead to various performance results that are depended on the origin of the nation of the organization. The study further provided an empirical and theoretical analysis for the effect of various kinds of block-holders, concentrated ownership and their impact on the performance of IPO in the two mature markets of North America with various institutional settings.

References

Asker, F.-M. a. L., 2014. Review of Financial Studies. s.l.:s.n. Ball, 2012. Short run money demand. Journal of Monetary Economics, pp. 622-633. Cirillo, R. a. A., 2015. Management Decison. s.l.:s.n.

Dongxin, X. H. W. a. E., 2014. Disagreement on Institutional Investor's Bids and IPO Pricing Mechanism. Economic Reserach Journal, p. 013.

Moorman, W. a., 2015. Going Public. Journal of Marketing Research, pp. 694-709.

Perera, K., 2016. Evidence of from Australian Initial. Journal of Insurance and Financial Management, pp. 505-525.

Sharma, M., 2017. Nexus among Holding Periods. The Journal of Accounting and Mangement.

Shi, L. a., 2016. An Empirical Reserach: Modern Economy. s.l.:s.n.

Urusua, B. a., 2017. Reserach in Economics. s.l.:s.n.

Wang, L. a., 2015. The cross section of expected holding period returns and their dynamics. Journal of Financial Economics, pp. 505-525.

Zervoudi, S. a., 2016. Review of Behavioral Finance. s.l.:s.n.

Link to access empirical article:

https://spiral.imperial.ac.uk/bitstream/10044/1/17877/2/Strategic%20Management%20Journal_31_5_2010.pdf

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