The Woods Co. and the Mickelson Co. have both announced IPOs at $60 per share. O

Question

The Woods Co. and the Mickelson Co. have both announced IPOs at $60 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is which. You plan to buy 600 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 600 shares in Woods and 600 shares in Mickelson, what would your profit be? (Do not round intermediate calculations.) Profit $ What profit do you actually expect? (Do not round intermediate calculations.) Expected profit $

Explanation / Answer

Step 1; Formula = Number of shares * issue price

Buying shares of 600 of each issue:

Profit 600*9 - 600*4 = Profit = 3000

One-Half of the shares will be received in case of oversubscription.

Your expected profit will be

300*9 -600*4 = 300

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