8. value 10.00 points Problem 15-4 IPO Underpricing [LO3] The Woods Co. and the

Question

8. value 10.00 points Problem 15-4 IPO Underpricing [LO3] The Woods Co. and the Mickelson Co. have both announced IPOs at $79 per share. One of these is undervalued by $13, and the other is overvalued by $3, but you have no way of knowing which is which. You plan to buy 1,700 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 1,700 shares in Woods and 1,700 shares in Mickelson, what would your profit be? (Do not round intermediate calculations.) Profit What profit do you actually expect? (Do not round intermediate calculations.) Expected profit

Explanation / Answer

a). Profit = 1,700($13) - 1,700($3)

= $22,100 - $5,100 = $17,000

b). Since you will only receive one-half of the shares of the oversubscribed issue, your profit will be:

Expected profit = 850($13) - 1,700($3)

Expected profit = $11,050 - $5,100 = $5,950

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