The Watson Co. and the McIlroy Co. have both announced IPOs at $45 per share. On
ID: 2761727 • Letter: T
Question
The Watson Co. and the McIlroy Co. have both announced IPOs at $45 per share. One of these is undervalued by $11.50, and the other is overvalued by $5.50, but you have no way of knowing which is which. You plan on buying 1,250 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. (Enter your answer as directed, but do not round intermediate calculations.)
What profit do you actually expect?
The Watson Co. and the McIlroy Co. have both announced IPOs at $45 per share. One of these is undervalued by $11.50, and the other is overvalued by $5.50, but you have no way of knowing which is which. You plan on buying 1,250 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. (Enter your answer as directed, but do not round intermediate calculations.)
Explanation / Answer
Watson Co. Mcllroy Co. Net Price 45.00 45.00 Undervalued 11.50 Overvalued 5.50 Order Given 1,250.00 1,250.00 Order processed 625.00 1,250.00 Profit 7,187.50 0 Loss 0 6,875.00 Total 7,187.50 6,875.00 312.50 Expected Profit: Order Given 1,250.00 1,250.00 Profit 14,375.00 0 Loss 0 6,875.00 Total 14,375.00 6,875.00 7,500.00
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