ZHULIAN CORPORATION BHD was founded in 1989 and based in Penang, Malaysia. It is an investment holding company which is primarily engages in the manufacture and direct selling multi level marketing with a niche in custom jewelry in Malaysia, Thailand and Indonesia. Beside it has diversify its business to food and beverage products comprising her-based food beverages and fruit cordials with juice concentrates and home care products which is consisting of laundry detergents dish washing liquids, nutritional health products and air freshener fragrances. Zhulian has issue 100 million of share IPO to raise RM122.34 million from capital market with RM1.23 per share. With the share offered, 87.84 million will be allocated for Bumiputra investors, 17.25 million for eligible directors, employees and business associated and 17.25 million for the public. http://findarticles.com/p/news-articles/new-straits-times/mi_8016/is_20070404/zhulian-spend-rm26m-plant/ai_n44361190/
Furthermore, it has expand its business in printing brochures, leaf legs, catalogues, name cards and other related document.
Nowadays, Zhulian distributor's base in the ASEAN region has reached 479,413 in number and it has over 230 agencies and 365,000 independent distributors in Malaysia, Thailand, Singapore and Indonesia.
However, there are around 389 licensed direct selling companies locally are multi level market MLM segment, so that MLM business in Malaysia is very competitive with a high number of rivals. Beside all of it has differentia its product, but most revolve around nutritional, healthcare, household product and personal care, according to Ministry of Domestic Trade and Consumer Affairs.
The major competitor which is listed MLM Company is Amway Holdings, CNI Holding, Hai-O Enterprise, DXN Holdings.
There are 2 main possible source of competitive advantage of ZHULIAN introduce MLM market by direct sell. This is created special feature quality in its product and provides professional service for customer.
ZHULIAN has seeking newer and better production methods to improve its product quality introduce to its customer and keep their loyalty. With its quality control, it has its own manufacturing which is newest Plot 3 facilities and production system with obtain both ISO 9001:2000 and GMP (Good Manufacturing Practice) certification to signify its strong capability in innovation and R&D to reach highest quality standards that have been in place in meeting the market demands.
In order that to provide added value, quality and diversity of product range to its distributors and customers, ZHULIAN has expanding range of the products manufactured by this plant. Besides, ZHULIAN has organize a R&D team which is consists of expertise professionals and Director in the companies to expand its product and find solutions to the problems affecting the eco-system especially the pollution of the environment.
However, Zhulian is expanding its business by direct selling MLM to become high revenue corporation, therefore it has to improve its employee knowledge with its product to increase their promote skill and professional service to more competitive in direct sell market. In order that to created the most conducive working environment for them to realize its employee, distributors or agent who are full potential and capability. ensures that training and development programmed are higher efficiency in improve their professional knowledge and skills to make them able to continue to advance together with the company and to solving practical problems and attaining the goals of group by improve ideas, initiatives and creativity.
Furthermore, building a large network is the important tools to enhance improve employee sales in direct selling to increase company revenue also. So Zhulian has always diversity among employees and distributors to promote team work in all the companies under the Group in building a strong people network, by that way will improve employee interaction at all levels and fully understand about company's direction and goal also.
On the other hands in the market segmentation, Zhulian is target at Bumiputra consumer majority races in Malaysia. Beside it able performance well in Thailand, Singapore and Indonesia is because the culture of these country is similar with Malaysia, so Zhulian market is wider around south east Asia than others competitors.
http://zhulian.listedcompany.com/misc/research_reports/Zhulian_OSK_300410.pdf
Nevertheless threats do exist by focus in Malay consumer, its product is not popular for other races like Chinese, Indian and others may never hear about Zhulian product. So its market is limited in Malay, unlike its competitors Amway and COSWAY which is popular for everyone. However MLM market should be open its market to everyone, because that will increase its revenue and increase its brand image for everyone.
Discuss the pros and cons for the company to go public.
The advantage of being a listed company is additional capital can be raised by issuing more shares or debentures, enjoys greater borrowing power, board of directors with expertise or experience can be appointed to take decisions and delegate's responsibilities, last is shareholders can sell and transfer their share easily.
Zhulian is a multi level market corporate, with that MLM is a strategy which is higher capital budget require. Because it needs to have enough funds to increase geographical expansion to oversee, improve in branding of product, development multi product line such as new factory, quality control, material and more which is require large scale to develop. Base on few owner capitals is no enough to develop and unable enhance its competitive potential by less economic of scale to expand. Therefore, the company has to public and raised fund from public by issuing more shares or debentures and borrowing funds from financial industries by greater borrowing power.
In the management, a corporate should have a person who is prepare to has certain experience can be appointed to take decision and delegate's responsibilities to make decision to improve corporate revenue and fulfill entire shareholder interest.
When a corporate Public, it has to publish its balance sheet and its corporate information in annual report for investor to observe its performance and improve its reputation. Since Zhulian business started, it has create very well and stable growth performance in historical result, means that its management is doing well and able to lead the company to gain a higher public profile after public, which can be good for business.
Because public company shareholder can transfer their share easily without any permission from other shareholder. Normally, investor will choose a corporate which has good reputation, certain potential in profit in future and good management structure under their expected to invest, because that will pay an impressive dividend and share price raising in future. So if the corporate performance not very well in these certain condition under expected of shareholder, they will sell their share and transfer to other investors easily , corporate share became unattractive cause share price fall. Conversely, if the corporate perform very well, its share will be attractive and cause share price rising. A float of share price reflection makes it easier for investor to realize corporate investment.
Besides that, being a public company can provide customers and suppliers with added reassurance. The corporate being listed have to fulfill the condition in profit, corporate financial and performance were set by (Security Commission) SC institution and monitor by SC. therefore the public company has more value in its reputation rather than using cheating running its business.
However Zhulian is a corporate of launching multi-level market policy, it has many different supplies provide different range of material and wide customer base deal with it. Therefore, it has to create a confident for supplies and customers by increase its reassurance and public profile.
Disadvantage of public is the founder ownership will be loss of overall control of the business because of control power in Public company is depends on the percentage of total share, the owner will have election right to involve making decision if they have holding enough partial of share. Therefore, the corporate management planning decision will be more difficult making due to different objective owner involve decision making and that more people to share the profits, the owner income from corporate return will be lessees. The founder of Zhulian Teoh Beng Seng is a largest holder who is holding 39.16% of share before public, but after public he just holding 10.53% became second largest of shareholder after largest holder Zhulian Sdn Bhd, therefore his control power will not as much as before public. Fortunelly, Teoh Beng Seng has held 95.86% share of Zhulian Sdn Bhd, so he also can control with holding 42.67% of indirect share of Zhulian corporate Bhd. Besides that, base on Malaysia law the company going to public have to allocation a certain partial of share offer for Bumiputra investor, so Zhulian has 87.84 million at discount price for Bumiputra investor, therefore the stock allocated to Bumiputra may illiquid compare to market, because the stock is limited to Bumiputra investor. Beside selling at discount price will cause corporate raise less capital from the stock and having same cost of capital with offer to market. http://www.cpps.org.my/downloads/factsheets/National%20unity%20factsheet.pdf
Zhulian-groupinfo (part2)-promoters-businessoverview-industryoverview-approval-RPT(2.3MB).pdf
Furthermore, significant expenses are incurred when setting up a company, like legal fees, accountant's fees, higher corporate taxes, consultants charge and more. Besides, after public will be more statutory regulations that have to comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance.In the process of IPO issue, Zhulian has bear all expenses 3 million relating to the Restructuring and listing in registration fee, professional fees, SC's fee, advertising and printing expenses. Besides, it spends around RM1.2 million for professional services rendered by advisers and experts. http://biz.thestar.com.my/news/story.asp?file=/2007/4/4/business/17342688&sec=business
On the other hands, because there are public investor involve in the listed company, therefore the public corporate has to prepared published accounts and financial affairs must be disclosed publicly. So the competitor will easily obtain the information of corporate. However Zhulian is launching MLM market business, the information of the corporate is important to its corporate, like future planning, strategy, cost of product and more. Therefore others competitors will able to getting its information easily and seeking for a new planning to gain more market share.
Discuss the under pricing phenomenon of the IPO and evaluate the extent of the under pricing
Company Name
Issue Price
Shares
Listing
Date
Board
Sector
Open
Price
(First
Day)
Closing
Price
(First
Day)
Public
Issue
Sale
Offer
Zhulian Corporation Bhd
(5131 / ZHULIAN)
RM 1.23
17,250,000
105,091,000
27-Apr-07
Main
Consumer Products
RM 1.38
RM 1.50 (or overpricing).
Normally, IPO first day market closing price will going to higher and give large initial return for investor with purchase at under pricing of offer price. Review to others corporate IPO issue during Zhulian IPO issue date period also most of underpriced.
Base on Zhulian IPO table can see that the IPO issue price is RM1.23 and the first day open price is RM1.38 and first day Closing price is RM1.50. The IPO issue price is under pricing around 22%, RM4,657,500 left on the table. According to annual report before public in end of year 2006, the Book value of the Zhulian firm is RM249, 260,000.00. When it first day public closing market capitalization is RM517,500,000, the Book to Market ratio is 0.48 less than 1. From the result reveal that Zhulian IPO has successfully market reaction is first day. In the first week close price is RM1.34; the gain of first week is 8.9%.
Company Name
Issue Price
Shares
Listing date
Board
Sector
Open Price (First day)
Closing price (First day)
Issue
Offer
Deleum Bhd
2.55
14,000,000
6,450,000
1-Jun-07
Main
Trading/ Services
3.98
5.4
Underpriced
(5132 / DELEUM)
Help International Corporation Bhd
0.8
14,776,000
22-May-07
Second
Trading/ Services
0.88
0.92
Underpriced
(7236 / HELP)
Natural Bio Resources Bhd
1.48
75,000,000
71,999,900
14-May-07
Second
Consumer Products
1.6
1.67
Underpriced
(7237 / NATBIO)
Zhulian Corporation Bhd
1.23
17,250,000
105,091,000
27-Apr-07
Main
Consumer Products
1.38
1.38
Underpriced
(5131 / ZHULIAN)
Superlon Holdings Bhd
0.72
9,351,400
25-Apr-07
Second
Industrial Products
0.85
0.82
Underpriced
(7235 / SUPERLN)
Ogawa World Bhd
1
12,000,000
36,000,000
18-Apr-07
Main
Trading/ Services
1.4
1.23
Underpriced
(5128 / OGAWA)
ATRIUM REIT
1.05
15,500,000
60,000,000
2-Apr-07
Main
REITS
0.95
0.94
Overprice
(5130 / ATRIUM)
Melati Ehsan Holdings Bhd
1.28
6,000,000
4,000,000
19-Mar-07
Main
Construction
1.42
1.54
Underpriced
(5129 / MELATI)
Beside Zhulian issue IPO at proper timing during higher performance of stock market KLSE above of 1300 in 27 Apr 2007. Because during that time is bull market, the KLSE index is shooting up from 1096.76 1st Jan 2007 to 1320.17 27th Apr 2007. So the expectation of investor is keep optimistic opinion with Zhulian IPO and create more demand of its stock. From the table of ?? can see that all the IPO during that period is performance very well in first day except ATRIUM REIT corporate is overpriced in first day.
Because of Zhulian's majority shareholder has no entre into lookup agreement which is a contract between underwriters and the pre-IPO shareholders that bar share sales for a specified period after the IPO, usually six months to control the high floating of share in the market.
So after IPO, Zhulian share price is unstable in initial four mouth public until 31st of Aug'07. The demand and supply of stock is change quickly and liquidity of stock is higher, average volume within that period is 1,221,677 cause the market floating is more than up to 11% during initial four month.(Appendix?). That is because imbalance or asymmetry information in the market cause lemon problem which is playing by block holder insider selling the share of holding during the share price is higher, cause the supply increase sharply and the spread between supply and demand increase also, lead to share price decrease. Especial in 29th May'07 the share price decrease to RM1.02 from RM1.14 drop 11%.
There are 7 reasons for new issues under pricing phenomenon with different theories focusing on three aspects of the relations between investors, issuers and investment bankers taking the firm public.
The Winner's curve hypothesis. The Fixed number of IPO is sold at a fixed offering price, rationing will result if demand is unexpectedly strong. If investor who has advance information about the share likes directors, insider and more, they will worse off the IPO when they get unfavorable news. Therefore less information investor will get all the share which they ask for because they are don't know about the unfavorable news like higher aftermarket trading costs associated with asymmetric information liquidity risk. So they are facing winner's curse adverse selection problem and the under price of IPO is to compensate them for the bias in the allocation of new issues. (Ibbotson ,1975). Too high pricing were set might induce investors and issuers to fear a winner's curse or a negative cascade leaves the issuer with too high a probability of complete failure (Welch ,1992 & Rock ,1986).
Market feedback hypothesis. That is a strategy for investment banker to under price IPO to induce regular investor to reveal about value of share favorable information than unfavorable information during pre-selling period and assist in pricing issues. Because investment banker has to create a confident about the news issue share for investor by favorable information. Michaely and Shaw ~1994!
Bandwagon hypothesis. Bandwagon effect may develop if the potential investor pay attention not only to their own information about a new issue, but also to other investors are purchasing, bandwagon effect may develop. Because the confident opinion of follower investor may affect by demand situation of IPO, they will never interesting the IPO which is no one else want to buy because that is unfavorable information opinion to them. Therefore, the under price of IPO able to induce the first few potential investors to buy and induce bandwagon in all subsequent investor want to buy irrespective of their own information.
However Market feedback hypothesis and bandwagon hypothesis is a strategies that to reaction the market to created optimal opinion and favorable information for investor and improve their confident of IPO, because the share is new and without historical result for investor to justify. So if the demand of IPO is not very well, investment banker can't adjust the price of IPO that will affect the investor's optimal opinion of the IPO and create unfavorable information. Therefore they will postpone the IPO date rather than adjust price of IPO. However that is not happened in Zhulian IPO during the pre-selling period, means that the demand of Zhulian is very well at pre sell.
Investment banker's monophony power hypothesis. Because issuer is less sophisticated, therefore they have to rely on investment banker who has advance sophisticated with superior knowledge of market conditions to sell the IPO to the market. Therefore issuer will permits investment banker to expend less marketing effort and ingratiate themselves with buy side client. Besides, investment bankers have been successfully at convincing client and regulatory agencies, that under pricing is normal for IPOs. (Baron ,1982) CIMB Investment Bank Bhd is the adviser for Zhulian's listing and setting the offer price by interplay of supply and demand, so Zhulian under price its IPO will able to selling easy to investor within pre-selling period.
Furthermore, Zhulian stock 22% of under price has create higher aftermarket trading volume at 53,402,800 in first day.
That is because under pricing of IPO is related to investment banker's benefit from aftermarket trading volume. Normally an Investment bank who is become market maker for these IPO will suggest to underpice IPOs in order to protect their reputation and benefit from under pricing leads to more aftermarket trading volume to increase the revenue for investment banker. Beside it under pricing also induce its clients in exchange for their loyalty and continued business and reduce investment bank's legal liability by lowering the change of price declines. (qfinance.com)
Trading volume in the aftermarket is higher, when the Under pricing level is higher. (See Krigman, Shaw, and Womack, 1999 and Ellis et al., 2000) for related evidence).
http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/2/the-cost-of-going-public-why-ipos-are-typically-underpriced.pdf
Lawsuit avoidance hypothesis. Since the securities ACT of 1933 makes all participants in the offer who sign the prospectus liable for any material omission. The issuer will protect themselves from lawsuit by avoid any liable for legal omission. So due to reducing the frequency and severity of future lawsuits is underpriced IPO. (Tinic ~1988! And Hughes and Thakor ~1992)
Signaling hypothesis. The attention of IPO is important to issuer to create a positive signal the market. Therefore the firm whether they have high or low values, they will follow the dynamic issue strategy, in which the IPO will be followed by a seasoned offering with under pricing IPO to create a positive signal and leave a good taste with investors. Consequently, which will allow the firms and insider to sell future offerings at a higher price than would otherwise be the case.
Furthermore under pricing also helps to overcome adverse selection problem. Normally low quality issuer which is worse than average will sell its stock at average price. So the rational investors will suffer lemons problem, because of issuer is more informed than investors. So base on information asymmetry, Zhulian corporate is belong to high quality issuers. It able to under price its IPO than its market worth to signal its quality to outside investors and distinguish with lower quality issuer, because under pricing is costly for low quality issuer to mimic. ~Welch ~1989!
In order to create positive signal, Zhulian has make announcement during offer for sales period that future growth of corporation. There are geographical expand its business to Taiwan and Hong Kong through its international sponsoring programme. Improve its existing product line to increase diversified and competitive edge, future dividend growth and more of future growing under corporate planning announcement. (Allen and Faulhaber ~1989)
Table 1 (Distribution of Shareholding)
Size of Holding
No of Shareholders
% of Shareholders
No of Shares
% of Issued Share Capital
less than 100
2
0.1
100
0
100-1,000
491
23.75
467,800
0.14
1,001-10,000
1119
54.14
5,601,700
1.62
10,001-100,000
375
3.68
11,823,400
3.43
100,001-17,249,999
76
0.19
88,610,340
25.68
17,250,000-345,000,000
4
100
238,496,660
69.13
Total
2067
181.86
345000000
100
Ownership dispersion hypothesis. Disperse ownership will lead to increase liquidity of the market for stock and make it difficult for control by outsider to challenge management and aftermarket trading. Therefore the issuer will underpriced IPO in order to generate excess demand and disperse to large number of small shareholder by rationing. Underpricing creates excess demand and thus allows issuers and underwriters to decide to whom to allocate shares. (Booth and Chua,1996, Brennan and Franks,1997, Mello and Parsons ,1998 and Stoughton and Zechner ,1998)
In the ownership dispersion of Zhulian issuer has success to control the percentage of shareholder's control power. With the table of Distribution of Shareholding can see that just have four number of shareholder is under largest range of size of share holding. Most of shareholder 54.14% is holding 1,001 to 10,000 number of share, therefore the market of stock is liquid. However there are four main directors holding 69.13% of issued share capital and not allow others unfavorable people to control the share to challenge management.
(ZHULIAN-AnnualReport2007(2.5MB).pdf)
Jegadeesh, Weinstein, and Welch ~1993! find that returns after the first day are just as effective in inducing future issuing activity as the first-day returns are.
All theories of underpricing based on asymmetric information share the
prediction that underpricing is positively related to the degree of asymmetric
information.
Discuss the long run performance of the IPO.
In the long performance of the Zhulian IPO, there is closely related with the Malaysia economic effect in share market, average initial return buy and hold comparing offering price with current market price and Book to Market ratio.
Dealing in consumer product business in Malaysia majority Zhulian corporate performance has highly affected by Malaysia economic condition and reflect in long run share price performance, according to the historical result.
Figure 1
Figure 2
Let see the initial four month, the share price of Zhulian is perform unstable, that is because the most optimistic investors buy the IPO so the different with KLSE is because effect by IPO initial market reflect. Furthermore over the time can see that Zhulian share price line trend is similar with KLSE line trend.
From the figure 1 has show that Zhulian share price performance in year 2008 and 2009 is not very well. That is affect by financial crisis worldwide economic down turn in Aug year 2007, the export of Malaysia decreasing causing consumption dropping, investor is lack of confident to consumer product category of Zhulian share. (www.bnm.gov.my), therefore it is market effect long run underperformance period. Base on the correlation of calculation between relation of KLSE and Zhulian share price, the result is positive 0.46. Means that consumer product category Zhulian share is Moderate relation with Malaysia economic. (http://www.bized.co.uk). From the Figure 1 and 2 had show that the trend of KLSE and Zhulian share price is similar. During Sep 2008, the economics of Malaysia is recovery period and lead the share price of Zhulian going upward sharply and over the IPO price.
Annual report
2006
2007
2008
2009
Book Value of firm
RM 249,260,000.00
RM 283,500,000.00
RM 342,457,000.00
RM 373,334,000.00
Number of ordinary share
1,000,000,000.00
1,000,000,000.00
1,000,000,000.00
1,000,000,000.00
Average market share price/yr
RM 1.50
RM 1.19
RM 0.99
RM 1.71
Market value of firm
RM 1,500,000,000.00
RM 1,191,351,000.00
RM 986,538,000.00
RM 1,710,860,000.00
Book to market ratio
17%
24%
35%
22%
The Book to Market is a ratio used to find the value of a company by comparing the book value of a firm to its market value and attempts to identify a firm is undervalue or overvalue by taking the book value dividing its market value.
From above of Table 4 has show that the Zhulian Book to Market ratio is less than 1,means that Zhulian is overvalue over past 3 year listed. That is because the market believes the potential and growth opportunities of Zhulian. But during the year 2007 and 2008 the ratio is raise sharply, because of year 2007 financial crisis effect the average share price not do well even the value of Zhulian firm has increase upward sloping from year 2007 to year 2009, but the market capitalization value is lower. Fortunately, the ratio has improve and going downward in year 2009.
Initial Return
2007
2008
2009
2010
(Long Run)
yr1
yr2
yr3
yr4
Per yr return
-4%
-25%
12%
93%
Year
2004
2005
2006
2007
2008
2009
EPS
13.39
18.23
22.77
18.05
21.65
23.77
Although Zhulian share price performance is not going well during 1st Aug 2007 to 20st Apr 2008, therefore IPO buy and hold investor initial return is negative. When year 2009 the share price of Zhulian is raising and over the offering price RM1.23, so if the investor holds it they will get 12% of initial return. But however that is considering loss because the Malaysia economic just recovery and the market are still unstable. While the investor confident and Malaysia consumption is just star establish, therefore if they hold 4 year just getting 12% return and they is losing time value of money and opportunity cost. When look at year 2010 performance, Zhulian share price has rising sharply to the pick over 4 year historical result RM2.89, during that year the average share price RM2.37. The initial return for the investor who has holding is 93%. On the other hand, the earning per share (EPS) will indicate that how the company efficient using the capital to generate income and the rate of growth a company earnings are growing on per share basis. From the table has show that before public result compare to after public result. From the result can see that the EPS of Zhulian has raising ever year exception the year 2007 because of financial crisis economic downturn, especially during last two is raising sharply. From the over 4 year result has proof that Zhulian share is a kind of long term investment share, it has high growth opportunity in long run from historical result.
Evaluate the capital structure of the company and suggest any way to enhance its current capital structure.
(15 marks)
Capital structure is means that a corporation finances its assets through combination of equity and debt. There are several factors that have to consider whether to raise funds from debt or equity which is business risk effect pay debt ability, firm's tax exposure if tax deductibility advantage, financial flexibility, conservatism or aggressiveness of management to boost profit and financial risk.
However raising fund from debt will provide the advantage of tax deductibility of interest payment and lowers the effective cost of using debt. Therefore the firm's manager is more prefer to use debt in an effort to boost profits.
Conversely, using debt as source of financing will increase the financial risk for a firm's shareholder to bearing the payoff certain interest additional risk.
According to past 4 years annual report of Zhulian, it was no borrowing after public 2007, so the debt to asset ratio is going lower compare to before public of year 2006. However in year 2008 because of economic not doing well so the debt is raised at highest point, but all the debt is belong to kind of deferred tax liabilities, accrual and payable without interest pay debt interest. Therefore Zhulian corporate is bearing lower financial and business risk with lower debt ratio. Interest pay for debt is zero after public, according to annual report income statement.
Year
2006
2007
2008
2009
Debt (RM)
41,638,000.00
33,733,000.00
62,881,000.00
52,798,000.00
Equity (RM)
206,995,000.00
249,679,000.00
279,576,000.00
320,536,000.00
Asset (RM)
248,633,000.00
283,412,000.00
342,457,000.00
373,334,000.00
Leverage Ratio
20%
14%
22%
16%
Debt/Asset
17%
12%
18%
14%
EPS (sen)
7.03
12.67
11.00
14.00
Bearing lower financial risk and business risk due to financing from capital market totally is a good thing to a corporate. But in tax consideration, Zhulian is lost its tax shield from debt interest paid opportunity with using debt to financing. Therefore its EPS still has a lot of progressive space to improve its EPS by financing certain ratio of debt instead of share issue. According to Jyskebank and The Star website has reveal that the return of risk free currently is 3.45% and return from market portfolio is 25.76%.
Ks=
RFR +_ B (Rmtk - RFR)
=
3.45%+0.65 (25.76%-3.45%)
=
17.95%
WACC=
100% x 17.95%
=
17.95%
The WACC of Zhulian is remain higher, means that the firm has to earning higher than 17.95% to cover the cost of capital.
Although the profit after tax is higher in fully raising form capital market, but more man less share and higher tax expense, the EPS is lower because of after tax profit has to share with bigger number of shareholder. So the firm has to take consider of its tax exposure to using debt to lower the effective cost by tax deductibility of interest payment to compensate the business and financial risk is bearing. By that way, effect of taxes allows firm can deduct interest payment as an expense in tax and dividend are not allowable. That will encourage more firm is using debt financing with the different advantage between share and borrowing to maximize the EPS of the firm.
At the same time, just maximize EPS by that way not means can create a optimal structure, because increase using debt will cause cost of debt increase due to higher debt levels are more likely to experience financial distress, the beta estimate will higher also, shareholder require higher rate of return and WACC cost of capital will be higher. The earning of the firm are paid out as dividend with zero retention rate causing the growth rate in EPS is equal to zero and affect the stock price performance.
Therefore Optimal structure is the one the maximizes the firm's stock price. Means the management has to borrowing at suitable percentage of debt in debt to asset ratio maximize the stock price performance. The graph has showed the maximum stock price which has using certain weight of capital and debt source to financing.
In concluded, Zhulian should increase in its debt to asset ratio to reach its maximum stock price level by lower its WACC cost of capital to maximize its stock price.
www.bnm.gov.my/files/publication/fsps/en/2008/fs2008_book.pdf
http://www.bized.co.uk/timeweb/crunching/crunch_relate_expl.htm
123.34 million shares in the company at RM1.23 per share.
Of the shares offered, 87.84 million will be allocated for Bumiputera investors; 17.25 million for eligible directors, employees and business associates and 17.25 million for the public.
Market return 25.76% https://jyskebank.fr/wps/wcm/connect/0097d88043ce753bbe41bf544e3474e5/341522_ModelPortfolio2010EmergingMarkets.pdf?MOD=AJPERES&CACHEID=0097d88043ce753bbe41bf544e3474e5
Beta 0.65 http://zhulian.listedcompany.com/misc/research_reports/Zhulian_OSK_300410.pdf
Risk free rate 3.45% http://biz.thestar.com.my/news/story.asp?file=/2010/5/17/business/6267959&sec=business
Lookup agreement
http://www.ccfr.org.cn/oa/files/files/20040525081952_TX_Development-5-25-04.pdf
A number of articles focus on the actions of the lead underwriter when
aftermarket trading begins. Underwriters can influence the aftermarket price
not only by their pre-IPO decisions on pricing and allocation, but also through
actively participating in the aftermarket themselves.
Underwriters not only have price discretion, but also quantity discretion.
In allocating shares, they control not only who gets shares, but how many
shares in the aggregate are allocated. Almost all IPOs contain an overallotment
option for up to 15 percent of the shares offered.12 In allocating shares,
if there is strong demand, the underwriter will allocate 115 percent of the
shares. Then, if the price weakens in aftermarket trading, the underwriter
can buy back up to the extra 15 percent and retire the shares, as if they had
never been offered in the first place.
Conclusion
Underpricing comes at the expense of the original owners and venture capitalists of the issuing firm.
However, these insiders typically do not strongly oppose or even attempt to avoid it, because they generally
do not sell their shares until about six months later, after the lockup period expires. To them, underpricing
creates excitement that could help create sustainable interest in the firm's shares, thus keeping demand
strong until they are ready to sell. Additionally, insiders are so contented with their new-found wealth that
they do not mind leaving some money on the table for new investors. Underpricing is simply viewed as an
inevitable cost of going public.
