Cloud4All is going public. 7 million shares will be offered. Companies of this type can have $130 million if high value with 30% probability, or $40 million if low value with 70% probability. Informed investors request 2 million shares if high value. Uninformed investors request 6 million shares in all cases because they cannot distinguish. What should be the Offer Price of this IPO so that uninformed investors break even? What would be the profit for informed investors?
Cloud4All is going public. 7 million shares will be offered. Companies of this type can have $130 million if high value with 30% probability, or $40 million if low value with 70% probability. Informed investors request 2 million shares if high value. Uninformed investors request 6 million shares in all cases because they cannot distinguish. What should be the Offer Price of this IPO so that uninformed investors break even? What would be the profit for informed investors?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Cloud4All is going public. 7 million shares will be offered. Companies of this
type can have $130 million if high value with 30% probability, or $40 million if
low value with 70% probability. Informed investors request 2 million shares if
high value. Uninformed investors request 6 million shares in all cases because
they cannot distinguish. What should be the Offer Price of this IPO so that
uninformed investors break even? What would be the profit for informed
investors?
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