P15-4 IPO Underpricing [LO3] The Woods Co. and the Mickelson Co. have both annou
ID: 2812439 • Letter: P
Question
P15-4 IPO Underpricing [LO3] The Woods Co. and the Mickelson Co. have both announced IPOs at $49 per share. One of these is underv alued by $12, and the other is overvalued by $7, 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 filled. Assume you could get 1,000 shares in Woods and 1,000 shares in Mickelson. Required: (a) What would your profit be? (Do not round your intermediate calculations.) (Click to select (b) What proft do you actualily expeet? (Do not round your intermediate calculations.) References eBook & Resources Dimculty: Basio Section Worksheet P15-4 IPO Underpricing [LO3] Learning Objective: 15-03 Initial public offerings and some of the costs of going ublicExplanation / Answer
a) If you could 1000 shares of each stock, then you would $12 on the undervalued stock and lose $7 on the overvalued stock.
Profit = 1000 x ($12 - $7) = $5000
b) You expect that your order will be rationed and only half of it will be fulfilled in case of the undervalued stock. So, you would earn $12 on 500 shares but still lose $7 on 1000 shares.
Profit = (500 x $12) - (1000 x $7) = (-)$1000
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