Phil and Terry started a new business three years ago. Two years ago, they incor
ID: 2750991 • Letter: P
Question
Phil and Terry started a new business three years ago. Two years ago, they incorporated the business and issued themselves each 20,000 shares of stock. Last year, they took the company public in an IPO and issued an additional 100,000 shares of stock at that time. The offer price was $14 a share, the spread was 8 percent, and the lockup period was six months. The stock closed at $17 a share at the end of the first day of trading. During the first six months of trading, the stock had a price range of $13 to $23 per share. During the second six months of trading, the stock sold between $15 and $21 per share. Both Tracie and Amy purchased 100 shares at the offer price. Given this, which one of the following statements is correct? Ignore trading costs and taxes. The maximum price at which Terry could have sold shares is $21. Phil could have sold 5,000 shares at $23 per share. The underwriters earned a spread equal to 8 percent of $17. Amy paid 108 percent of $14 per share to purchase her 100 shares. Tracie could have earned a maximum profit of 100($23 -17) on her investment.Explanation / Answer
Since the lockup period is 6 months, Phil and Terry cannot sell their stock in the market in the first 6 months of listing, so both of them cannot sell their stock for $23. Option B is incorrect
Underwriters earned 8% on $14 which is offer price, not $17. Option C is incorrect
Amy bought 100 shares at offer price which is $14, but not 108% of $14. So option D is incorrect
Tracie could have earned maximum profit of (23-14) on her investment. So option E is incorrect
Only option A is correct, which is Terry can sell his stocks at a maximum price of $21. Since there was a locking period, he cannot sell his stock in first 6 months.