Question

The Koepka Co. and the Johnson Co. both have announced IPOs at $40 per share. One of these is undervalued by $12.25, and the other is overvalued by $5.50, 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.

a) If you could get 1,000 shares in Koepka and 1,000 shares in Johnson, what would your profit be
b) What profit do you actually expect? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
c) What principle have you illustrated? Profit Expected profit Principle Break-even Prisoner's dilemma Winner's curse

Answer 1

Answers are stated below

Step-by-step explanation:

a. According to the information of the exercise:

Profit = shares * undervalued value - Shares * Overvalued

Profit = 1,000($12.25) – 1,000($5.50) = $6,750

b. Expected profit = 500($12.25) – 1,000($5.50) = $625

c. Winner’s curse