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Chapter 23, Problem 17P

a.

Summary Introduction

To determine: The average IPO underpricing.

Introduction: When a company sells its share publically in an open market for the first time, it is known as initial public offering (IPO).

b.

Summary Introduction

To determine: The expected one-day return on IPO portfolio.

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Answer the following questions on margin trading. a) Suppose that Intel is currently selling at $20 per share. You believe that the stock price of Intel will increase. So you buy 1,000 shares using $15,000 of your own money, borrowing the remainder ($5,000) of the purchase price from your broker. (i) What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $24; (ii) $16? (ii) If the maintenance margin is 25%, how low can Intelľ's price fall before you get a margin call? (iii) How would your answer to part ii) change if you had financed the initial purchase with only $10,000 of your own money? b) Discuss margin buying of common stocks. Include in your discussion the advantages and disadvantages and investors' motivation of employing the margin buying strategy.
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