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Amanda has an arrangement with her broker to receive 3,200 shares of all available IPOs. The average IPO offer price is $15. When the IPO
Amanda has an arrangement with her broker to receive 3,200 shares of all available IPOs. The average IPO offer price is $15. When the IPO is very successful, which is 15% of the time, the average closing price at the end of the first day of trading is $25. When the IPO is successful, which is 75% of the time, the average closing price at the end of the first day of trading is $18 and when the IPO is unsuccessful, which is 10% of the time, the average closing price at the end of the first day of trading is $10.
- Calculate underpricing when the IPO is very successful, successful, and unsuccessful. What is the average IPO underpricing?
- Suppose the shares are rationed 30 to 1 when very successful, 10 to 1 when successful, and 1 to 1 when unsuccessful. What is Amanda’s expected one-day dollar return on her investments?
- Given the return in (b) above, what is your view on whether Amanda will continue to invest in future IPOs and why?
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