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