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Jasmine has an arrangement with her broker to receive 1,500 shares of all available IPOs. The average IPO offer price is $20. When the IPO
Jasmine has an arrangement with her broker to receive 1,500 shares of all available IPOs. The average IPO offer price is $20. 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 $30. 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 $22 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 $16.
- Calculate the underpricing when the IPO is very successful, successful and unsuccessful. What is the average IPO underpricing? (2 marks)
- Suppose the shares are rationed 25 to 1 when very successful, 15 to 1 when successful and 1 to 1 when unsuccessful. What is Jasmines expected one-day dollar return on her investments? (3 marks)
- Given the return in (b) above, what is your view on whether Jasmine will continue to invest in future IPOs and why? (1 mark)
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