Can someone please give me the correct answers for this. Thank You. The Watson C

Question

Can someone please give me the correct answers for this. Thank You.

The Watson Co. and the Mcllroy Co. have botn announced IPOS at $41 per share One ot these is undervalued by S9 50. and the other is overvalued by S4.50. but you bave no way of knowing wbtcb is which. You plan on buying 1.050 shares oî eacb issue. If an issue is underpriced. it will be rationed. and only balf your order will be filled (Enter your answer as directed, but do not round intermediate calculations.) Assummg you could get 1.050 shares in Watson and 1.050 shares in Mcllroy. what wouid your profil be? What profit do you actually expect? What principe have you Uhistrated?

Explanation / Answer

Answer 1 is profit on listing = 22.5, calculated as below:

As we will get half of sahres applied in the issue which is undervalued, we will get 525 shares of the company where it is undervalued by 9.5 and will get 1050 shares of the company which is overvalued by 4.5. We need not to know whichone is under or overvalued as numbers are same. So profit will be (9.5*1050/2) + (-4.5*1050) = 262.5

Answer 2:Expected profit: We would expect that we get full allotment of both issues, so expected profit will be:

= 9.5*1050 + (-4.5*1050) = 5250

Answer : Principle applied divercification and profit maximisation

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