Question

The Bert Corp. and Ernie, Inc., have both announced IPOs. You place an order for 1,150 shares of each IPO. One of the IPOs is underpriced by $18.00 and the other is overpriced by $6.50. You will receive all of the shares you ordered of the overpriced IPO, but only one-half of the shares you ordered of the underpriced IPO. What profit do you expect?
a. $31,875.00.
b. $11,562.50.
c. $14,375.00.
d. $7,552.00.
e. $2,812.50.

Answer 1

Answer:

The Bert Corp. and Ernie, Inc.

The profit expected is:

= $2,875.

Explanation:

a) Data and Calculations:

                           The Bert Corp.    Ernie, Inc.

IPO order placed  1,150 shares      1,150 shares

Underpriced by       $18.00

Overpriced by                                   $6.50

Profited expected    $10,350          -$7,475

Net profit = $2,875 ($10,350 - $7,475)

b) The profit expected is generated from the underpriced stock.  This profit is reduced by the increased cost incurred on the over-priced stock.  Therefore, the net profit is the difference between the profit and the additional cost incurred.