1. Explain the phenomena of IPO udnerpricing. Do you think that IPO underpricing is a sign of market inefficiency?

2. Carlyle plc and Mullan plc 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 gen 1,000 shares in Carlyle and 1,000 shares in Mullan, what would your profit be? What profit do you actually expect? What principle have you illustrated?

3. ABC plc decides to raise 160 million through a right issue. The firm plans to the rights issue at a discount of 20 per cent to the current market price of 5. The company has 100 million shares outstanding.

(i) what is the value of a right?

(ii) What are the current terms of the rights issue?

(iii) How would an investor with 10,000 shares be affected if they:

• Exercised their rights
• Sold their rights

4. A companys equity currently sells for $45 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a shareholder must remit 10 and three rights. (a) what is the ex-rights share price? (b) what is the price of one right? (c) When will the price drop occur? Why will it occur then?