Question

The Woods Co. and the Speith Co. have both announced IPOs at $63 per share. One of these is undervalued by $11, and the other is overvalued by $4, 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. a. If you could get 1,000 shares in Woods and 1,000 shares in Speith, what would your profit be? (Do not round intermediate calculations.) b. What profit do you actually expect? (Do not round intermediate calculations.)

Answer 1

Answer:

Profit is equal to $7000

Expected profit is equal to $1500

Explanation:

Number of shares = 1000

Undervalued amount = $11

Overvalued amount = $4

Profit received by both the stocks is equal to

Profit = shares ×undervalued amount - shares × overvalued amount

$=1000\times 11-1000\times 4$

=$7000

Expected profit is equal to

$=\frac{1000}{2}\times 11-1000\times 4$

= $1500