Question

if an investor can earn 20% on underpriced IPOs, but will loose 10% on overprices IPOs in which he was awarded $2000 worth of the overprices issue, how much of the underpriced issue must he be awarded to gain $500

a. $1,500

b. $2,500

c. $3,500

d. $10,000

e. none of the above

Answer 1

Here, we’ve Required Gain = $500

Earnings on Under-priced IPO = 20%

Value of Overpriced IPO = $2,000

Loss on Overpriced IPO = 10%

Therefore, Gain = (20% x Under-priced IPO) – (10% x Overpriced IPO)

$500 = (0.20 x Under-priced IPO) – (0.10 x $2,000)

$500 = (0.20 x Under-priced IPO) – $200

$500 + $200 = (0.20 x Under-priced IPO)

$700 = (0.20 x Under-priced IPO)

Under-priced IPO = $700 / 0.20

Under-priced IPO = $3,500

“Hence, the value of under-priced issue that he must be awarded to gain a $500 would be = $3,500”