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(Solution document) The Woods Co. and the McIlroy Co. have both announced IPOs at $44 per share. One of these is undervalued by $11.00, and the other is overvalued by...



The Woods Co. and the McIlroy Co. have both announced IPOs at $44 per share. One of these is undervalued by $11.00, and the other is overvalued by $5.25, but you have no way of knowing which is which. You plan on buying 1,200 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.

 

Assuming you could get 1,200 shares in Woods and 1,200 shares in McIlroy, what would your profit be? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

 

Profit           $ 

 

What profit do you actually expect?  (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

Expected profit           $ 

 

What principle have you illustrated?


A) Winner's curse

B) Prisoner's dilemma

C) Break-even

 


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