Question

1- Erik, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Alison, is willing to sell 1,500 shares of the same stock. Unfortunately, Erik and Alison don’t know one another and must complete their transactions using the stock exchange’s market-making dealer. XYZ’s market maker is willing to sell her shares for $35.95 per share and purchase additional shares for $34.50 per share. Select the most appropriate values in the following table:

Term	Value
Bid price	34.5 or 41.40 or 35.95
Ask price	34.50 or 35.95 or 53.93
Bid-ask spread	35.95 or 1.45 or 116.61

2- If the market maker is willing to purchase the entire block of 1,500 shares from Alison and, from that block, resell 1,000 shares to Erik, then the market maker’s net profit from Erik’s transaction—excluding any inventory effects—will be   

- 725

- 632

- 1450

- 2,175.00

3-

WAC Inc. is going public and issuing 500,000 shares of common stock. The capital raised in the IPO will fund the company’s proposed expansion. A Dutch auction is used to allocate shares in the WAC IPO. The following table shows the number of shares requested by potential investors in each row.

Bids	Number of Shares Requested	Price per Share
Bidder # 1	50,000	$60
Bidder # 2	100,000	58
Bidder # 3	150,000	56
Bidder # 4	200,000	54
Bidder # 5	250,000	52
Bidder # 6	300,000	50

What should be the firm’s IPO offer price?

$56

$52

$54

$53

Answer 1

1. Bid Price is the price at which dealer willing to buy the security

Ask Price is the price at which dealer willing to sell the security

Bid Ask Spread = Ask price - Bid price

Term	Value
Bid price	34.5
Ask price	35.95
Bid-ask spread	1.45

2. Market Makers Net Profit = Lowest of sale or purchase shares * Bid ask spread

Market Makers Net Profit = 1000 * 1.45

Market Makers Net Profit = $1450

3. Cumulative shares

the IPO share price is the price where Cumulative Shares equal the IPO Shares

Thus Issue Price = $54 Option C

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