Assume the following: there is a 50% of IPOs are worth $20 per share and 50% are worth $30 per share. 1,000,000 shares will be sold in an IPO. There are 10,000 informed investors and 10,000 uninformed investors. Each buys 100 shares. If there is excess demand, the shares are allocated randomly among investors who wanted to buy shares. Informed investors know exactly what each IPO is worth. Uninformed investors do not.

A. What is the average per-share value of an IPO?

B. According to Rock's model, what is the price of shares in an IPO?

C. How much are IPOs underpriced on average in this example? (Put another way, what is the average first day return for IPO

Answer rating: 100% (QA)

Analyzing the IPO A Average pershare value 50 of IPOs are worth 20 per share and 50 are worth 30 per ... View the full answer