Question 5 (0.16 points) What usually happens to the price of a stock on its fir

Question

Question 5 (0.16 points) What usually happens to the price of a stock on its first day of trading? O It falls, because investors are trying to cash out O It falls, because the underwriters have underpriced it O It rises, because most IPOs are good investments O It rises, because the underwriters have underpriced it Save Question 6 (0.2 points) Shum Co. is going public, selling 100 million shares. There is a 50% chance it is an average firm, and 50% chance it is a "star." If it is average, the firm's value will be $400 million. If it is a star, the firm's value will be $600 million. Assume uninformed investors will always order 100 million shares. Informed investors, however, will order 100 million shares only if the firm is a star. What should the underwriter price this offering at to ensure uninformed investors are not expected to lose money? 0 $4.00 O $4.67 $5.00 O $5.33 Save

Explanation / Answer

Question 5:(Option d) It rises, becuase the underwriters have underpriced it

Explnation: Most business and the underwriters want their stock price to move up, so they undprice the issue

Question 6:

Since uninformed investors should not loose money, The stock should be priced at the minimum that is 400 Million/100 Million = $4

Answer : $4.00 (Option A)

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