The Woods Co. and the Garcia Co. have both announced IPOs at $43 per share. One

Question

The Woods Co. and the Garcia Co. have both announced IPOs at $43 per share. One of these is undervalued by $10.50, and the other is overvalued by $5.00, but you have no way of knowing which is which. You plan on buying 1,150 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.

What profit do you actually expect? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

The Woods Co. and the Garcia Co. have both announced IPOs at $43 per share. One of these is undervalued by $10.50, and the other is overvalued by $5.00, but you have no way of knowing which is which. You plan on buying 1,150 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.

Explanation / Answer

1) Profit = 1150*(Undervalued amount - overvalued amount)

= 1150*(10.5-5) = $6325

2)Expected profit = (1150/2)*Undervalued amount - 1150*overvalued amount = 575*10.5 - 1150*5 = $287.5

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