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The Woods Co. and the Garcia Co. IPO Underpricing Problem

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The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $11, and the other is overvalued by $6, but you have no way of knowing which is which. The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $11, and the other is overvalued by $6, 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. If you could get 1,000 shares in Woods and 1,000 shares in Garcia, what would your profit be? What profit do you actually except? What principle have you illustrated?

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Solution Summary

The solution explains some calculations relating to 3 IPO underpricing questions.

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1. If we get 1,000 shares in each, the profit would be
1,000 X 11 - 1,000 X 6 = $5,000
one is undervalued by $11 (profit) and one is ...

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