due on Sep 6th before Midnight Question 5 (of 9 13.00 points P15-4 IPO Underpric
ID: 2812172 • Letter: D
Question
due on Sep 6th before Midnight Question 5 (of 9 13.00 points P15-4 IPO Underpricing L03] The Woods Co.and the Mickelson Co. have both announced IPOs at $49 per share. One of these is undervalued by $14, and the other is overvalued by $6, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue If an issue is underpriced, it will be rationed, and only half your order will be led. Assume you could get 1,000 shares in Woods and 1,000 shares in Mickelson la) What would your peofit be? (De not round your intermediate calcuilations to select) (bi What oroft dto vou actualy expect? (Do not round your intermediate caloulations.) (Cick to select) 8,000 7S70 7,670 1,000 5,730 7,050 Book & Resources Oifficulty Basic Section: 15.05 POs and P1 5-4 IPO Underpricing [LOS] Leaning ceeche 154s inhal ptic
Explanation / Answer
One IPO is undervalued by $14 and the other is overvalued by $6. It does not matter which company's IPO is overvalued and which company's IPO is undervalued since both the IPOs are same priced i.e $49.
(a) Hence, gain on 1,000 shares of undervalued IPO = 1,000 x 14
= $14,000
Hence, loss on 1,000 shares of overvalued IPO = 1,000 x 6
= $6,000
Hence, net gain on the whole transaction = 14,000 - 6,000
= $8,000
Hence, correct option is (d)
(b) When an issue is undervalued, it will be rationed and only half allotment will be made.
Hence, gain on 500 shares of undervalued IPO = 500 x 14
= $7,000
Hence, loss on 1,000 shares of overvalued IPO = 1,000 x 6
= $6,000
Hence, net gain on the whole transaction = 7,000 - 6,000
= $1,000
Hence, correct option is (c)
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