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, and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 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 700 shares in Woods and 700 shares in Garcia, what would your profit be? (Do not round intermediate calculations.)

What profit do you actually expect? (Do not round intermediate calculations.)

The Woods Co. and the Garcia Co. have both announced IPOs at $43 per share. One of these is undervalued by $10, and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 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 700 shares in Woods and 700 shares in Garcia, what would your profit be? (Do not round intermediate calculations.) Profit $ What profit do you actually expect? (Do not round intermediate calculations.) Expected profit $

The Woods Co. and the Garcia Co. have both announced IPOs at $43 per share. One of these is undervalued by $10, and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 700 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.

Explanation / Answer

A) If you could get 700 shares in Woods and 700 shares in Garcia, what would your profit be ?

Solution:- (700 shares @$4 loss + 350 shares @ $10 gain)

   = -2800 + 3500

= 700

Conclusion: Profit = $ 700

Note:- Since an issue is underpriced, it will be rationed, and only half your order will be filled. Accordingly half of 700 share i.e., 350 will be filled at the rate of 10.

B) What profit do you actually expect ?

Solution:- If You had received 700 shares of each Woods Co. and the Garcia Co., Then the gain would have been = (700 shares @$4 loss + 700 shares @ $10 gain)

   = -2800 + 7000

= 4200 Profit.

Conclusion: Expected Profit = $ 4200

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