Question: Pills4u com and Drugs R Us Co both sell prescription medications over the

Pills4u.com and Drugs-R-Us Co. both sell prescription medications over the Internet. Each company has recently announced an IPO at $15 per share. At this price, one of the companies is undervalued by $1.50, while the other is overvalued by $1.00. Unfortunately, you have no way of knowing which is which, as you have no particular expertise in pharmaceuticals or Internet sales. Nonetheless, you plan to buy 1,000 shares of each company's stock at the offer price.
a. If you are allocated the full 1,000 shares of each new issue, how much profit will you make when the shares adjust to their true value?
b. If an issue is undervalued, it will be rationed, and you will only get half your order. What profit do you expect in this situation?
c. If an issue is undervalued, it will be rationed, and you will only get one-fifth of your order. What profit do you expect in this situation?




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  • CreatedFebruary 25, 2015
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