IPO Underpricing Carlyle plc and Mullan plc have both announced IPOs at $40 per

Question

IPO Underpricing Carlyle plc and Mullan plc have both announced IPOs at $40 per share. One of these is undervalued by $11, and the other is overvalued by $6, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. If you could get 1,000 shares in Carlyle and 1,000 shares in Mullan, what would your profit be? What profit do you actually expect? What principle have you illustrated?

Explanation / Answer

expected profit = 11$ gain on the 1000 shares (the announcement was undercvalued and it will gain it market value) - 6$ loss on 1000 share(the announcement was fo them to be overpriced than the actual value)

thus '

Profit = 5*1000 = $5000

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