The Woods Co. and the Spieth Co. have both announced IPOs at $49 per share. One of these is undervalued by $14, and the other is overvalued by $5, but you have no way of knowing which is which. You plan to buy 1,500 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 1,500 shares in Woods and 1,500 shares in Speith, what would your profit be

Question

Jonathon Mahoney

Business

15 June, 11:39

The Woods Co. and the Spieth Co. have both announced IPOs at $49 per share. One of these is undervalued by $14, and the other is overvalued by $5, but you have no way of knowing which is which. You plan to buy 1,500 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 1,500 shares in Woods and 1,500 shares in Speith, what would your profit be

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Answers (1)

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Harper Mcgee · Answer 1

The profit that would result from both shares is $13,500

Explanation:

Loss would emanate from overvaluation while profit would result from undervaluation, that is the key to solving the question.

Loss from overvaluation=1,500*$5=$7,500

Profit from undervaluation=1,500*$14=$21,000

Profit from the investment = Profit from undervaluation-loss from overvaluation=$21,000-$7,500=$13,500