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    IPO Underpricing

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    The Johns Co. and the Eversmann C0. 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 other 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 Johns and 1000 shares of Eversmann, what would your profit be? What profit do you expect? What principle have you illustrated?

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    What would your profit be?

    If we could get 1,000 shares in each the profit would be
    1,000X 11 - 1,000 X 6 = $5,000
    We profit for the undervalued shares by $11 and lose ...

    Solution Summary

    The solution explains some calculations relating to IPO underpricing.