Question

1. TradeMe Group Limited (TradeMe hereafter) completed its IPO in 2011. The stock was offered at a price of $2.7 NZD per share. On the first day of trading, the stock closed at $2.9 per share. What was the initial return on TradeMe? Who benefited from this underpricing and who lost? Please provide brief explanation for each.
2. What was the initial return on TradeMe?
3. Who benefited from this underpricing and who lost? Please provide brief explanation for each.

Answer 1

1) The initial return on the stock is = Closing price - purchase price/purchase price x 100

=$2.9 NZD - $2.7 NZD/ $2.7 NZD x 100 = 7.41%

2) The investor benefited from this underpricing as he could purchase the stock at a price lower than its value. Open the share was listed on the stock exchange it was trading for higher price and what it was purchased for and hence resulted in a 7.41 % return.

The company who issued the shares was at a loss because it could sell the shares for $2.9 NZD and acquire more capital in its IPO.

Therefore the investor benefited from this underpricing and the issuing company lost.

Do let me know in the comment section in case of any doubt.