IPO and Dividend Discount Model - Assignment Example

IPO and Dividend discount Model Name Course Code Institution Date of Submission PART A Question 1 To determine the level of under pricing, Market Adjusted Initial Return (MAIR) is applied. Market modified preliminary come back is calculated by deducting the offer cost from the cost at the opening day of a trading separated by the offer cost and is modified by the industry come back. Market come back is measured from come back of KLSE blend catalog (KLCI) from the date of prospectus to the first day of dealing. The data explains that both standard unrefined Initial Returns (IR) as well as the standard MAIR is not the same from Zero when at 1% stage showing that In Australia, the IPOs of public sector which have been privatized are undervalued. There is minimal distinction in the way of undervaluing among IR and MAIR. From the 39 examples of companies listed, 30 turned out positive Initial Returns while 19 became negative standard Initial Returns. The companies are from various sectors such as property, industrial sector, trading and service sector, consumer sector, infrastructure sector and lastly the financial sector. Likewise, 37 companies obtained positive MAIR while three had negative returns. Among the 37 companies that had positive standard initial returns or underpriced, the maximum amount of under pricing was My ATM Holdings Limited with 950% a financial sector company listed on 13th January 2011, at the same time the lowest was Potash West NL a company in the trading sector listed on 13th May 2011 which recorded a 3%. The first variable is RISK and it is expected to favorably impact level of undervaluing. This research discovers that RISK highly impacts level of undervaluing. The second variable of catalog during one month prior to record (INDEX) can favorably impact preliminary come back. The last variable is the SIZE of the company is taken as a normal logarithm of net resource value before privatization. This outcome is reliable with the outcome revealed in Su (2004) who find an insignificant and adverse connection between conventional difference of market come back 30 days before formal record. In addition to that, size of the company is taken as a normal logarithm of net resource value before privatization. Question 2 What seems to be underpriced in the short-run changes out to be costly in the long-run. This argument has been confirmed in a quite number of researches performed mostly in designed market of US and Australia. However, the result revealed from research in creating and growing nations has not been definite. Kim, Krinsky and Lee (1995) reviews the long-run mean related firm-adjusted Initial Return for the first 24 several weeks of preparing is just like 59.01 percent, showing that Sydney IPOs outshine professional companies with identical features. In this study that was conducted in the Australian Market, it was determined that in the first two years, majority of the firms had a percentage between 3%-95% this implies that the companies are performing not as intended in the date of listings. One of the reasons why in the long run the IPO companies do not perform well is due to Several writers have analyzed upgrade long-run performance of IPOs from a variety of nations. In the U.S., scientific proof reveals that, in the long-run, IPOs is underperformed comparative to the overall industry. Ritter (1991) get the relevant company modified collective regular profits in three decades –29.1%. Aggarwal and Rivoli (1990) reviews industry modified profits –13.7% from first day of dealing to the 250 times of dealing. In other nations, the outcomes are reliable with those of U.S. Levis (1993) reviews a long-run deficit of 30.59% by the third season after the offer provided in Great Britain. Also Finn and Higham (1988) review a 6.5% one year industry modified profits in Australia. In addition, Dawson (1987) reviews exciting proof that in the long-run, IPOs on regular outshine the overall industry by 18.20% in one season. Other scientists confirming identical outcomes are Ljungqvist (1997) for Malaysia and Aussenegg (1999) for Belgium. Miller (1977) existing an description depending on changes in the divergence of viewpoint among traders. According to him, IPOs are usually signed up by traders who are the most positive about the problem and their costs are set by this team rather than the evaluation of the common trader. Further, the greater the doubt about the value of the IPO, the greater is the cost that positive traders are willing to pay comparative to negative traders. Moreover to that, Shiller (1990) suggested that industry for IPOs is topic to trends. IPOs are underpriced by financial commitment lenders to make the overall look of unwanted requirement. Shiller’s speculation anticipates that the long-run performance of IPOs should be adversely relevant to the short-run under pricing. Question 3 A huge variety of facts of IPO under pricing in the brief run come from research of U.S. financial commitment industry (Ritter, 1991; Ibbotson, Sindelar, and Ritter, 1994) as well as other western world such as Europe (Levis, 1993). In North america, Kooli and Suret (2001) review that IPOs underperform considerably in evaluation to professional companies with the same industry capital. By evaluation, IPOs in creating nations display even greater preliminary unwanted profits e.g. Malaysia 166.67% and Singapore 39.4% (Dawson, 1987). In Chile, regular preliminary come back is 16.3% (Aggarwal et. al., 1993). In UK, Privatization IPOs provide a important underpricing of 38.7% evaluate to 3.4% for personal industry problems (Menyah & Paudyal, 1996). Paudyal ET. AL. (1998) found that privatization IPOs in Malaysia were underpriced more than personal industry IPOs. In brief, most facts display that in the short-run IPOs are underpriced either in designed or growing financial systems. Baron (1982) recommended that the organization wants to increase net selling continues, and provides a delegation agreement to the expert, who places the cost and markets the stocks. Both organization and expert are threat fairly neutral. The organization is less advised than the expert, in that it does not notice some requirement parameter before acquiring, and it cannot notice the underwriter’s submission attempt. In this establishing, Baron reveals that the maximum provide cost is a reducing operate of the issuer’s doubt about the financial commitment industry circumstances. Rock (1986) represents that there are two categories of traders, and one team is better advised than the other team and the organization about the real value of the organization. The better advised traders register to the not costly problems where as the unaware traders register to the whole problems. This is known as winner’s problem. To get over this winner’s problem, the provides have to be underpriced on regular otherwise; the unaware traders will not get involved in IPOs. More asymmetry of details about the value of the problem will require more underpricing. Beatty and Ritter (1986) examined the consequences of financial commitment financial institution popularity and discuss value doubt on IPO underpricing. The discuss value doubt is known as “ex-ante uncertainty”. They claim that the greater the level of ex-ante doubt, the greater the level of underpricing. Beatty and Ritter (1986) recommended that underwriters play an important part in implementing an stability whereby the relatively more risky organizations are underpriced more. Underwriter chooses to provide costs which are neither too great nor too low to keep their business in underwriting IPOs. Using (log [1+number of uses]) and inverse of total continue as proxy servers for ex-uncertainty, the results expose that underpricing was favorably relevant to ex-ante doubt. Allen and Faulhaber (1987), Grinblatt and Hwang (1989), and Welch (1989) design the underpricing in IPOs as a indication of the company's value. In these designs, the organization knows the true value of the provide, while traders are unaware. The great value company properly alerts its type through underpricing in the preliminary selling, because this will allow asking for greater costs in following provides. Here, underpricing happens in limited sales. Leland and Pyle’s (1977) design is one of the first signaling designs which described the issuer’s operate in the IPO process. Their design is a simple fixed stability design where the possession storage amount alerts to traders the great company's organization. They claim that the level of storage of stocks by unique investors can be a effective indication of the company value to strangers. This idea is very much linked with the principal-agent issue which should be less of a problem when entrepreneurs of the organization sustain a lot of stocks after the IPO, thus these organizations are considered as top great quality ones. Investors are required to make their IPO buying choices based upon this essential details. This design does not have scientific assistance, but it is the foundation for which Titman and Trueman (1986), Grainblatt and Hwang (1989) and Allen and Faulhaber (1989) develop their conceptual structure. Allen and Faulhaber (1989) used the bivariate signaling design which is an expansion of Leland and Pyle’s (1977). Moreover to possession storage amount being a indication of a business's great quality, the organization purposely undervalues his IPO as a second indication to express the top great company's organization to traders. By doing this, the organization offering the concept that it is economically audio and will be able to extract failures suffered by undervaluing the problem. PART B Approach I: “Dividend Discount Model” (1) Dividend payout in 7 years for Australia and New Zealand Banking Group Limited (ANZ) was chosen. |Dividend (in cents)                                                                                                     | |2004             |2005             |2006             |2007             |2008             |2009             |2010             | (data from http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/dividendspay?ASXCode=ANZ&xtm-licensee=finanalysis   Accessed on 14th August 2013) (2) Constant growth rate term Dividend growth can be noticed from the beneficial mountain in the Results against season chart. The beneficial mountain pattern range represents the dividend growth season by season. However, the range should not be a directly range if the dividend quantity of growth is continuous. This is because the directly range means that the quantity of increase dividend remains continuous whereas under a continuous dividend quantity of growth, dividend should grow in an increasing quantity. If the dividend quantity of growth is small in percentage, say less than 5% a season, a directly range straight line regression should give a quite precise prediction for the dividend in buy. Nevertheless, if the continuous dividend quantity of growth is excellent, the evaluation may differ quite a lot. For example, if the continuous dividend quantity of growth is 5% and beginning in season 2004, the dividend payment is equal to 100cents. 7 decades later that is in season 2011, the dividend payment should be equal to 162.89cents and the dividend payment is 150cents if approximated by using the straight line regression with a directly pattern range, that is 7.91% deviated from the real value. However, if the continuous dividend quantity of growth is 10% and beginning in season 2004, the dividend payment is equal to 100cents. 7 decades later that is in season 2011, the dividend payment should be 259.37cents and is 200cents if approximated by using the straight line regression with a directly pattern range. There would be 22.89% deviated from the real value which is a fantastic difference from the real value. In view of the above, the pattern range in rapid form is chosen to catch the last ten years’ pattern so as to project the Results payment this year (D7). The continuous development of dividend can then be calculated by using Geometrical Mean of the quantity of development of dividend of the last 7 decades. ( 7√(D7/D 0) – 1). Taking the Geometrical Mean of the last 7 decades is to remove the effect of the well known Financial Tsunami in 2008 to 2009 which hard hit international markets and caused most of the companies to record an unusually low dividend payment quantity. Dividend growth rate calculation For, Australia and New Zealand Banking Group Limited (ANZ) which was chosen Dividend (in cents)                                                                                                     |2004 (1)         |2005 (2)         |2006 (3)         |2007 (4)         |2008 (5)         |2009 (6)         |2010 (7)         Data from: (http://www.aspecthuntley.com.au.ezproxyf.deakin.edu.au/af/company/dividendspay?ASXCode=ANZ&xtm-licensee=finanalysis, Accessed on 14th Sept 2014) The equation of the Curve : y = 108.91e0.0213x. To project the dividend payout in 2011(D7), we may put x = 8. Then D7 = y = 129.14 cents. Therefore, the constant dividend growth rate = ( (D7/D 0)(1/7) – 1) = (129.14/101) (1/7) –1 =3.57% The R-square data is found to be quite low (0.1297) for this trend line. The accuracy of the forecasting data is therefore expected to be lower. As the global market was hard hit in 2009, the dividend payout data in 2009 deviates quite far from the trend line. (3) Net earnings from same sector (a) Banking Sector |Company Name                   |Stock Code         |*Reported NPAT before Abnormals (10’) $M   |Bendigo Bank - Bank Accounts, Bank, Credit Cards             |BEN                 |242.60                   |Bank of Queensland               |BOQ                 |179.6                                       |Commonwealth Bank Group     |CBA                 |5,664.00                                     |Firstfolio Limited                     |FFF                 |4.81                                         |Homeloans Ltd                           |HOM               |12.25                                       |Mortgage Choice Ltd.                 |MOC               |23.48                                       |National Australia Bank             |NAB             |4,224.00                                     |The Rock Building Society Limited |ROK               |5.08                                         |Wide Bay Australia Limited              |WBB             |22.30                                       |Westpac Banking Corporation            |WBC             |6,346.00                                     (* Reported NPAT before Abnormals = Reported net profit after tax before abnormals after tax and less outside equity interests and preference dividends) |Source Link (accessed on 14th Sept 2013)                                                                                         |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=BEN&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=BOQ&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=CBA&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=FFF&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=HOM&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=MOC&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=NAB&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=ROK&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=WBB&xtm-licensee=annualreportsonline                 | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualsummary?ASXCode=WBC&xtm-licensee=annualreportsonline                 | (4) ROE for the companies in the same sample set (a) Banking Sector |Company Name                          |Stock Code         |^ROE from Finanalysis Database(10’)         | |Bendigo Bank - Bank Accounts, Bank, Credit Cards             |BEN                 |8.00%                                       | |Bank of Queensland                     |BOQ               |8.56%                                       | |Commonwealth Bank Group     |CBA                 |16.91%                                       | |Firstfolio Limited                         |FFF                 |21.62%                                       | |Homeloans Ltd                              |HOM                |17.70%                                       | |Mortgage Choice Ltd.                   |MOC                 |30.38%                                       | |National Australia Bank               |NAB                 |11.76%                                       | |The Rock Building Society Limited |ROK                 |8.76%                                     | |Wide Bay Australia Limited         |WBB                 |13.84%                                     | |Westpac Banking Corporation       |WBC                 |15.42%                                     | |Arithmetic Mean of ROEs             |=                   |15.30%                                      | (^Return on Equity (ROE) = NPAT before abnormals / (shareholders equity - outside equity interests).) |Source Link (accessed on 14th Aug)                                                                                             | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=BEN&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=BOQ&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=CBA&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=FFF&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=HOM&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=MOC&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=NAB&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=ROK&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=WBB&xtm-licensee=finanalysis           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=WBC&xtm-licensee=finanalysis           | The ROE of MOC is abnormally high comparing with the others; however, most of the others give the ROE greater than 8% but below 22%. The arithmetic mean giving 15.30% of the sector should give a quite reasonable estimate for the cost of equity of the sector. (b) Media Sector |Company Name                       |Stock Code         |ROE from Finanalysis Database (10’)           |Amalgamated Holdings Limited      |AHD                 |12.99%                                      | |APN - News & Media                       |APN                 |10.21%                                       | |BSA Limited                                      |BSA                 |13.64%                                       | |Beyond International Limited            |BYI                 |15.85%                                       | |Consolidated Media Holdings           |CMJ                 |20.73%                                       | |Mitchell Communication Group       |MCU                 |12.04%                                       | |News Corporation                             |NWS               |11.12%                                       | |oOhMedia Group Ltd.                      |OOH                |8.07%                                         | |Macquarie Radio Network Limited   |MRN                 |36.24%                                       | |STW Communications Group Limited |SGN                 |11.12%                                       | |Arithmetic Mean of ROEs                     |=             |15.20%                                       | (^Return on Equity (ROE) = NPAT before abnormals / (shareholders equity - outside equity interests).) |Source Link (accessed on 14th Aug)                                                                                           | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=AHD&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=APN&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=BSA&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=BYI&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=CMJ&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=MCU&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=NWS&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=OOH&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=FXJ&xtm-licensee=finanalysis         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=SGN&xtm-licensee=finanalysis         | The ROE of MRN is abnormally high comparing with the others; however, most of the others give the ROE greater than 8% but below 21%. The arithmetic mean giving 15.20% of the sector should give a quite reasonable estimate for the cost of equity of the sector. (c)Tele communications Services Sector |Company Name                             |Stock Code             |ROE from Finanalysis Database (10’)         | |Amcom Telecom                   |AMM             |12.21%                                       | |Eftel Limited                     |EFT             |-13.75%                                     | |iiNet Limited                        |IIN                  |15.34%                                       | |Macquarie Telecom Group Limited |MAQ             |25.91%                                       | |Nexbis Limited                        |NBS               |-64.25%                                     | |Queste Communications Limited   |QUE              |1.33%                                       | |Singapore Telecom                  |SGT           |16.59%                                       | |Telstra Corporation                    |TLS               |30.58%                                       | |TPG Telecom Limited             |TPM           |12.51%                                       | |Vocus Communications Limited    |VOC                |38.66%                                       | |Arithmetic Mean of ROEs         |=                     |7.51%                                       | (^Return on Equity (ROE) = NPAT before abnormals / (shareholders equity - outside equity interests).) |Source Link (accessed on 14th Aug)                                                                                         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=amm&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=eft&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=iin&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=maq&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=nbs&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=que&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=sgt&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=tls&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=tpm&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=voc&xtm-licensee=finanalysis       | The ROEs in this sector differs from each other greatly, this may affect the estimation of the cost of equity of the sector. Probably there are some external factors that account for this great difference of ROEs between individual companies. (d) Consumer Durables & Apparel Sector |Company Name                         |Stock Code   |ROE from Finanalysis Database (10') | |Billabong International Limited |BBG           |12.00%                                   | |Energio Limited                         |EIO             |92.89%                                     | |Fisher & Paykel Appliances Holdings Limited |FPA     |5.68%                                         | |G.U.D. Holdings Limited                                   |GUD   |21.26%                                       | |Gazal Corporation Limited                                 |GZL    |12.78%                                       | |Kresta Holdings Limited                                   |KRS    |11.86%                                       | |Mcpherson's Limited                                       |MC     |13.39%                                       | |Merchant House International Limited               |MHI   |16.83%                                       | |Quantum Energy Limited                                   |QTM   |19.49%                                       | |Treyo Leisure and Entertainment Limited         |TYO    |8.59%                                         | |Arithmetic Mean of ROEs                                 |=         |21.48%                                       | (^Return on Equity (ROE) = NPAT before abnormals / (shareholders equity - outside equity interests).) |Source Link (accessed on 14th Aug)                                                                                         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=BBG&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=eio&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=fpa&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=gud&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=gzl&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=krs&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=mcp&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=mhi&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=qtm&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=tyo&xtm-licensee=finanalysis       | It could be observed that the ROE of EIO is abnormally high in the sample; this may cause the arithmetic mean of ROEs, which would be used as the cost of equity in the sector, to be overestimated (e) Transportation Sector |Company Name                                   |Stock Code         |ROE from Finanalysis (10      | |Australian Infrastructure Fund             |AIX               |11.79%                                     | |Air New Zealand Limited                    |AIZ               |5.87%                                     | |Chalmers Limited                               |CHR               |8.24%                                     | |CTI Logistics Limited                         |CLX               |15.75%                                     | |K & S Corporation Limited                 |KSC               |10.46%                                     | |Lindsay Australia Limited                                   |LAU               |8.41%                      | |Mermaid Marine Australia Limited     |MRM             |19.23%                                     | |Scott Corporation Limited                     |SCC               |17.53%                                     | |Toll Holdings Limited                         |TOL               |10.32%                                     | |Wridgways Australia Limited               |WWA             |34.53%                                     | |Arithmetic Mean of ROEs                   |=               |14.21%                                   | (^Return on Equity (ROE) = NPAT before abnormals / (shareholders equity - outside equity interests).) |Source Link (accessed on 14th Aug)                                                                                         | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=aix&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=aiz&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=chr&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=clx&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=ksc&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=lau&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=mrm&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=scc&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=tol&xtm-licensee=finanalysis       | |http://www.aspecthuntley.com.au.ezproxy-f.deakin.edu.au/af/company/annualratios?ASXCode=wwa&xtm-licensee=finanalysis       | It could be observed that the ROE of WWA is abnormally high in the sample; this may cause the arithmetic mean of ROEs, which would be used as the cost of equity in the sector, to be overestimated. (5) Share price estimation by DDM For Banking Sector, the estimated cost of equity (r) is 15.3%, the constant growth rate (g) of the Australia and New Zealand Banking Group Limited (ANZ) was computed to be 3.57% and the coming year dividend was computed to be 129.14cents. By applying the DDM, the theoretical stock price of ANZ= 129.14cents/ 15.3%- 3.57%= 1,100.94cents = 11.01dollar. Comparing with the close price, 20.65 dollar as at 15th Aug 2011 (data from http://au.finance.yahoo.com/q/hp?s=ANZ.AX, accessed on 15th Aug 2011), the theoretical price is lower than the current price for 46.68%. However, considering there would be errors in estimating the g in the model, it should not be treated as a sell signal. I recommend staying an INDIFFERNET position for this stock. For AEO, the estimated cost of equity is 15.20%, the constant growth rate is 5.82% and the coming year dividend was estimated to be 10.7cents. By applying DDM, the theoretical stock price of AEO= 10.7cents/ 15.2%- 5.82%= 114.07cents = 1.14 dollar.     Comparing with the close price, 2.04 dollar as at 15th Aug 2011 (data from http://au.finance.yahoo.com/q/hp?s=AEO.AX , accessed on 15th Aug 2011), the theoretical price is lower than the current price for 44.18%. I therefore recommend a SELL position for this stock.     For TEL, the estimated cost of equity is 7.51%, the constant growth rate is -1.55% and the coming year dividend is estimated to be 24.21cents. By applying DDM, the theoretical stock price of TEL= 24.21cents/ 7.51%- (-1.55%) = 267.22cents = 2.67dollar.     Comparing with the close price, 2.05 dollar as at 15th Aug 2011 (data from http://au.finance.yahoo.com/q/hp?s=TEL.AX , accessed on 15th Aug 2011, the theoretical price is higher than the current price for 30.24%. However, considering there would be errors in estimating the r and g in the model, it should not be treated as a buy signal. I recommend staying an INDIFFERNET position for this stock.     For TWD, the estimated cost of equity is 21.48%, the constant growth rate is 10.11% and the coming year dividend was estimated to be 25.51cents. By applying DDM, the theoretical stock price of TWD= 25.51cents/ 21.48%- 10.11%= 224.36cents = 2.24dollar     Comparing with the close price, 2.14 dollar as at 15th Aug 2011 (data from http://au.finance.yahoo.com/q/hp?s=TWD.AX , accessed on 15th Aug 2011), the theoretical price is higher than the current price for 4.67%. However, considering there would be errors in estimating the r in the model and the percentage difference between theoretical price and current price is small, it should not be treated as a buy signal. I recommend staying an INDIFFERNET position for this stock.     For MFT-NZ, the estimated cost of equity is 14.21%, the constant growth rate is 24.69% and the coming year dividend was estimated to be 30.46cents. DDM cannot be applied because the used g is larger than the used r. If the company's dividend growth rate exceeds the expected return rate, we cannot calculate a value because we get a negative denominator in the formula. Stocks don't have a negative value. Then MFT-NZ will be considered as a high-growth stocks and no fancy DDM model is able to solve the problem. Reconciliation report |Company             |Stock price at 15th |Stock price |Percentage  |Stock price    |Percentage| |Banking – ANZ   |20.65            |11.01          |46.68%       |17.30             |16.22%   | |Media – AEO     |2.04       |1.14             |44.18%     |1.45     |28.92 % | |Telecommunication-TEL|2.05           |2.67             |30.24%       |2.23               |8.78%     | |Consumer – TWD           |2.14            |2.24             |4.67%         |2.17               |1.4%       | |Transportation - MFT-NZ|10.21         |--                 |--               |5.57               |45.45     | |Aug 2011 (dollar)   |estimation by DDM   |different by DDM |estimation by PE   |different by PE| (dollar) (%) (Dollar) For the banking section, stock price estimation by PE is closer than DDM. It’s because the ANZ’s ROE’s 7.07% is exceptionally lower than the average 15.3%, which makes the calculation to be not accurate. For the Media section, stock price estimation by PE is closer than DDM. It’s because the AEO ROE’s 4.42% is exceptionally lower than the average 15.2%, which makes the calculation to be not accurate. For the Telecommunication section, stock price estimation by PE is closer than DDM. It’s because the ROE variation in the sector is so large, from NBS -64.25% to VOC 38.66%, which makes the calculation to be not accurate. For the Consumer Durable section, TWD stock price estimation is very close under both different approaches. For the Transportation section, DDM cannot be applied as MFT-NZ will be considered as a high-growth stocks and no fancy DDM model is able to solve the problem. The PE estimation is also not accurate because MFT-NZ’s PE is 20.63 which is much higher than the section estimation’s PE 9.3, so the PE estimation share price is lower than the actual stock price. REFERENCES Aggarwal, R., R. Leal, and F. Hernandez (1993). The Aftermarket Performance of initial Offerings in Latin America. Financial Management, 22, 42-53. Aggarwal, R. and P. Rivoli (1990). Fads in the Initial Public Offering Market. Financial Management, 19, 45-57. Allen, F. and G.R. Faulhaber (1989). Signalling by Underpricing in the IPO Market, Journal of Financial Economics, 23, 303-323. Baron, D. P. (1982). A model of the demand for investment banking advising and distribution services for new issues, Journal of Finance, Vol. XXLVII, 955 – 976. Beatty, R.P. and J.R. Ritter (1986), Investment Banking, Reputation, and The Underpricing of Initial Public Offerings. Journal of Financial Economics, Vol. 15, 213-232. Dawson, Steven M. (1987). Secondary Stock Market Performance of Initial Public Offerings, Hong Kong, Singapore and Malaysia: 1978-1984, Journal of Business, Finance and Accounting, 14 (1), 65-76. Grinblatt, Mark and Chuan Yang Hwang (1989). Signalling and the Pricing of New Issues, Journal of Finance,VI, No.2, 393-420. Ibbotson, R., Sindelar, J.R., & Ritter, J.R. (1988). Initial public offerings, Journal of Applied Corporate Finance, 1, 37-45. Leland, H. and D. Pyle (1977). Information Asymmetries, Financial Structure, and Financial Intermediation, Journal of Finance 52, 371-387 Menyah, K and Paudyal, K (1996). Share Issue Privatizations: the UK Experience. In Mario Lewis (Ed.) Empirical Issues in Raising Equity Capital: Advance in Finance, Investment and Banking, Elsevier, Amsterdam. Miller, E. (1977). Risk, Uncertainty and Divergence of Opinion, Journal of Finance 32, 1151-1168. Ritter, J. (1991). The Long-run Performance of Initial Public Offerings, Journal of Finance, 46, 3-27. Rock, Kevin (1986). Why New Issues are Underpriced, Journal of Financial Economics, 15, 187-212. Welch, Ivo (1989). Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings, Journal of Finance, Vol. 44, No.2, 421-443. Read More