The Woods Co.and the Mickelson Co.have both announced IPOs at $43 per share.One of these is undervalued by $20,and the over is overvalued by $14,but you have no way of knowing which is which.You plan on buying 1,000 shares of each issue.If an issue is underpriced,it will be rationed,and only half your order will be filled.What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?

Question

Quizplus · Accepted Answer

Expected profit = 500($20) + 1,000(-$14) = -$4,000Profit if 1,000 shares of each = 1,000($20) + 1,000(-$14) = $6,000Difference = -$4,000 - $6,000 = -$10,000