Take Test: Final Exam-E × o a hntps//dasses.alastaedu/webappsassessm L Question
ID: 2656973 • Letter: T
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Take Test: Final Exam-E × o a hntps//dasses.alastaedu/webappsassessm L Question Completion Status QUESTION 13 10 points Phil and Terry started a new business three years ago. Two years ago, they incorporated the business and issued themselves each 20,000 shares of stock. Last year, they took the company public in an IPO and issued an additional 100,000 shares of stock at that time. The offer price was $14 a share, the spread was 8 percent, and the lockup period was six months. The stock closed at $17 a share at the end of the first day of trading. During the first six months of trading, the stock had a price range of $13 to $23 per share. During the second six months of trading the stock sold between $15 and $21 per share. Both Tracie and Amy purchased 100 shares at the offer price. Given this, which one of the following statements is correct? Ignore trading costs and taxes O Tracie could have earned a maximum profit of 100(S23-17) on her investment Phil could have sold 5,000 shares at $23 per share. O The underwriters earned a spread equal to 8 percent of $17 O The maximum price at which Terry could have sold shares is $21. ?Army paid 108 pg(cent of S14 per share to purchase her 100 shares. QUESTION 14 10 points Save A The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent Stock B has a beta of 0.75 and an expected return of 11.4 percent Are these stocks correctly priced? Why or why not? O No, Stock A is underpriced and Stock B is overpriced Cliek Save and Submit to save and submit. Click Save All Answers to save all anscers. Save All Answers Save and Su Type here to searchExplanation / Answer
The Answer is: Option D. The maximum price at which Terry could have sold the shares is $21. Since there is a lock-up of 6 months, major equity holders/insiders cannot sell their shares in the market within 6 months. Thats why post 6 months, the maximum price that Terry coluld have got is $21.
Regarding Spread, below are the details for your reference:
Spread= 8%
Offer Price = $14 per share
Calculations:
Spread (in dollar terms) = 8% of $14 (offer Price)
= (8/100)*14= $1.12
Amy would pay $14 to buy the shares. $1.12 goes as the underwriting commission and the company gets ($14-$1.12) as the gross proceeds of IPO.
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