Question

The Woods Co. and the Mickelson Co. have both announced IPOs at $56 per share. One of these is undervalued by $8, and the other is overvalued by $2, but you have no way of knowing which is which. You plan to buy 1,200 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 1,200 shares in Woods and 1,200 shares in Mickelson, what would your profit be?

Profit

___________________$

What profit do you actually expect?

Expected profit____________________

$

Answer 1

Hi,

Please find the correct answer as follows:

Profit = (1200*8)-(1200*2)

=$7200

What profit do you expect in reality:

With rationing (and being an uninformed investor) we expect our profits = (600*8)-(1200*2)

=$2400