Question

"The Alpha Corp. and the Beta, Inc., have both announced IPOs priced at $20.00. Although you don't know this, the true value per share of Alpha is $22 and the true value per share of Beta is $18. You place an order for 1,000 shares of each IPO. The Beta IPO is undersubscribed and so all bidders are allocated all the shares they ordered. In contrast, the Alpha IPO is oversubscribed and so the bidders receive only half of the shares they ordered. Assuming the openning prices on the first day of trading are equal to the firm's ture values, what will be your $ profit?"

$0

"$2,000"

"-$1,000"

"$1,500"

"-$1,500

Answer 1

Number of Alpha share would be half of what has been placed as order because there is higher subscription and bidder only receiving half of the shares. Total number of Alpha equals to 500.

Gain on Alpha would be= 500×[22-20]

= $ 1000

Loss on beta share would be= 1000×[20-18]

= $2000

Overall gain/loss on both transaction

= (1000-2000)

= $-1000

Correct answer is option (B).