1. The three possible outcomes of an investemtn are listed below. All outcomes a
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Question
1. The three possible outcomes of an investemtn are listed below. All outcomes are equally likely. Calculate the average profit variation and the standard deviation of this invesment.
Profit
Best case +$400
Most likely +$150
Worst likely -$300
2. Gus Games stock currently sells for $50 per share. There are 4 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $45 per share.
a.) If the underwriring spread is 4%, how many shares will the company need to issue in order to be left with the net proceeds of $5 million?
b.)If other adminstrative costs are $90,000, what is the dollar value of the total direct costs of the issue?
Explanation / Answer
1. Avg outcome = (400+150-300)/3 = 83.33
Variance = ((400-83.33)^2+(150-83.33)^2+(-300-83.33)^2)/3 = 83,888.89
Standard deviation = 83,888.89^0.5 = 289.64
2. a. No of shares to be issued = 5,000,000/(45*(1-4%)) = 115,740.74, or rounding off to 115,741 shares
2. b. Direct costs = 115,741*45*4%+90,000 = $ 298,334
Hope this helped ! Let me know in case of any queries.
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