The Koepka Co. and the Woods Co. have both announced IPOs at $49 per share. One of these is undervalued by $14, and the other is overvalued by $5, but you have no way of knowing which is which. You plan on buying 1,500 shares of each issue. underpriced, it will be rationed, and only half your order will be filled. an issue is a. If you could get 1,500 shares in Koepka and 1,500 shares in Woods, what would your profit be? (Do not round intermediate calculations.) b. What profit do you actually expect? (Do not round intermediate calculations.)

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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**The Koepka Co. and the Woods Co. IPO Analysis**

Koepka Co. and Woods Co. have announced Initial Public Offerings (IPOs) at a price of $49 per share. It is known that one of these stocks is undervalued by $14 and the other is overvalued by $5. However, it is not possible to determine which company is undervalued or overvalued. The plan is to purchase 1,500 shares of each company's IPO. If one of the stocks is underpriced, shares will be rationed, and only half the order will be filled.

**Questions and Calculations:**

a. **Profit Calculation if Fully Filled:**
   - If 1,500 shares are bought in Koepka and 1,500 shares in Woods, what would the profit be?
   - *Note: Do not round intermediate calculations.*

b. **Expected Profit Calculation:**
   - What is the actual expected profit?
   - *Note: Do not round intermediate calculations.*

**Responses:**

- **Profit: $0** (marked incorrect)
- **Expected Profit: $3,000** (marked correct)

**Explanation:**

In this scenario, because there is uncertainty regarding which company is undervalued or overvalued, the calculations must consider the potential outcomes and probabilities related to partially filled orders and market conditions to approximate expected profits accurately.
Transcribed Image Text:**The Koepka Co. and the Woods Co. IPO Analysis** Koepka Co. and Woods Co. have announced Initial Public Offerings (IPOs) at a price of $49 per share. It is known that one of these stocks is undervalued by $14 and the other is overvalued by $5. However, it is not possible to determine which company is undervalued or overvalued. The plan is to purchase 1,500 shares of each company's IPO. If one of the stocks is underpriced, shares will be rationed, and only half the order will be filled. **Questions and Calculations:** a. **Profit Calculation if Fully Filled:** - If 1,500 shares are bought in Koepka and 1,500 shares in Woods, what would the profit be? - *Note: Do not round intermediate calculations.* b. **Expected Profit Calculation:** - What is the actual expected profit? - *Note: Do not round intermediate calculations.* **Responses:** - **Profit: $0** (marked incorrect) - **Expected Profit: $3,000** (marked correct) **Explanation:** In this scenario, because there is uncertainty regarding which company is undervalued or overvalued, the calculations must consider the potential outcomes and probabilities related to partially filled orders and market conditions to approximate expected profits accurately.
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