1. The IPOs for Dove and Dyson are just announced. Shares for Dove are sold at $20 while shares for Dyson are sold for $25. On the first day of trading on the secondary market, the price Dove shares is $16, and the price of Dyson shares is $27. The number of shares sold are 1,000,000 for Dove and 2,000,000 for Dyson.

(a) Calculate the market capitalization of the two firms using IPOs prices.

(b) Are the two IPOs in this example overpriced, underpriced, or correctly priced, on average? Explain.

There are two types of investors in the market. The first ones are unsophisticated while the second ones are sophisticated. Sophisticated investors have better access to information so they know that the true value of each company (thus, they anticipated that Dove's shares will drop, and that Dyson's shares will rise). There are 100 of each type of investors. Each unsophisticated investor has $700,000, and each sophisticated investor has $750,000.

2. Calculate the market demand in dollars ($) for these two firms stocks. [Assume that each unsophisticated investors splits her funds in proportion to the market capitalization of the firms that are going public; this means that they are not necessarily investing 50% of their funds in Dove and 50% in Dyson].

3. Calculate the number of shares of the two firms that a sophisticated investor is able to buy? What about an unsophisticated investor?

4. Calculate the average first-day return for both types of investors. Are unsophisticated investors making any profits from the IPOs investment?