One of the characteristics of IPOs that puzzles experts is that they tend to be underpriced. What are the explanations for IPOs being underpriced?
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Although underpricing takes place all over the country, people still try to figure out the reasons for it. When explaining underpricing of IPOs, explanations fall under four categories: Information asymmetry, institutional reasons, control considerations, and behavioral approaches. The information asymmetry model classifies investors as either informed or uninformed. Informed ...
Explains some reasons for IPO's being underpriced.
IPO, Flotation costs
1. IPO Underpricing. The James Co/and the Lars Co. have both announced IPOs at $30 per share. One of these is undervalued by $6, and the other is overvalued by $3, 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 James and 1,000 shares in Lars, what would your profit be? What profit do you actually expect? What principle have you illustrated?
2. Calculating Flotation Costs. The Clapper Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $75 per share and the company's underwriters charge a 7 percent spread, how many shares need to be sold?
5. Calculating Flotation Costs. The Moser Corporation needs to raise $35 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $42 per share and the company's underwriters charge a 6 percent spread, how many shares need to be sold?View Full Posting Details