Amelia Co. announced that it will go public by selling 100 shares at $10 per share. You know that, with a probability of 50%, the share of Amelia Co could be really worth $11 per share and or is only worth $9 per share (with a probability of 50%), but since you are not an expert in citrus fruits you have no way of knowing the price ex-ante (i.e. in advance). Since you are an uninformed investor (just like me!), you plan to request 100 shares of Amelia Co. You also know of one expert in citrus fruits who knows what each Amelia Co. IPO share is really worth, and who will request 100 shares if the IPO is underpriced IPOs, but will not participate in an overpriced IPO. Last, if an IPO is oversubscribed, the underwriter will use a pro-rata system to allocate the shares.

A. What profit do you expect to make using the strategy of submitting orders for 100 shares? 

B. An investment banker advises that Amelia Co. IPO shares may not sell at $10, as uninformed investors, at such a price, may not participate in the IPO market. How should owners modify the offer price to be able to sell all their shares?

Answer rating: 100% (QA)

A Since the probability of the share price being either 11 or 9 is 50 the expected value of the sh... View the full answer