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Two companies have both announced IPOs at $16.50 per share. One of these is undervalued by $2, and the other is overvalued by $1.60, but you have no way of knowing which is which. You previously placed an order for 1,000 shares of each issue. If an issue is undervalued, it will be rationed, and only half your order will be filled. What profit do you now expect

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Answer:

-$600

Explanation:

Given the following :

Order placed = 1000 of each issue

Initial public offering = $16.50

One is undervalued by $2

Other is overvalued by $1.60

If undervaluation occurs, only half will be filled

Undervalued issue :

(1000/2) × $2

= 500 * $2 = $1000

Overvalued issue :

(1000 * $(-1.60)) = $1,600

Expected profit:

Undervalued issue + over valued issue

$1000 + (-$1600)

$1000 - $1600 = -$600