Case study on Winchester Resources Ltd prospectus

Winchester Resources

In order to be listed on the Australian Stock Exchange, there are several requirements that must be met. According to the ASX website (2009), the company must meet "minimum standards of quality, size, operations and disclosure." The company must demonstrate that there is sufficient investor interest in the issue. In addition, the securities must be issued in a manner that is fair to both new and existing security holders. There are a number of other criteria as well. These include: rights and obligations that are fair to new and existing shareholders; the obligation of timely disclosure of material information, high integrity standards, consultation of security holders, including votes, on matters of significance; and the firm must engage in market transactions that are commercially certain.

The Australian Stock Exchange categorizes its listed companies based on industry sectors. There are a wide range of sectors listed on the exchange. As a mining exploration company, if Winchester is accepted onto the Australian Stock Exchange, it can expect to be categorized in the "Resources" sector. This sector is for firms that "offer investment exposure to most of the significant valuable elements that are extracted from below the earth's surface" (ASX, 2009). There are two main streams of the resources sector; Winchester would fall into the "Minerals" stream.

2. Winchester Resources does not intend to pay a dividend. The prospectus mentions that the firm may decide to declare a dividend at some point, but does not indicate any intent to do so in the future. The nature of the company's business -- mining exploration -- makes it unlikely that Winchester will pay a dividend in the foreseeable future. As with other mining exploration firms, Winchester must first find a valuable property and then must develop it before it would have the income streams necessary to pay a dividend. Thus, at this point, there are no plans for Winchester to pay a dividend.

3. Every firm has a value, based on its future cash flows, assets and other criteria. Most IPOs, however, are underpriced, meaning that the company is priced at a level that reflects a lower net worth than the company actually has. The result of this is that the IPO attracts more investors (Pons-Sanz, 2005). While the issuer does not receive fair value for the equity stake it is selling, the issuer does benefit from underpricing an IPO in that it virtually guarantees a fully-subscribed issue. An overpriced IPO, by contrast, can yield more investment capital for the issuer but bears greater risk that the issue will not be fully subscribed. The ideal price of the IPO strikes a balance that allows the firm to generate the greatest amount of capital.