Question
You have an arrangement with your broker to request 975 shares of all available IPOs. Suppose that 11% of the time, the IPO is very
You have an arrangement with your broker to request 975 shares of all available IPOs. Suppose that 11% of the time, the IPO is "very successful" and appreciates by 114% on the first day, 80% of the time it is "successful" and appreciates by 12%, and 9% of the time it "fails" and falls by 15%.
a. By what amount does the average IPO appreciate the first day; that is, what is the average IPO underpricing?
b. Suppose you expect to receive 55 shares when the IPO is very successful, 250 shares when it is successful, and 975 shares when it fails. Assume the average IPO price is $19. What is your expected one-day return on your IPO investments?
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Principles of Finance
Authors: Scott Besley, Eugene F. Brigham
6th edition
9781305178045, 1285429648, 1305178041, 978-1285429649
