I. B. Michaels has a chance to participate in a new public offering by Hi-Tech M

Question

I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 600,000 shares to be issued is very strong. His broker’s firm is assigned 30,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.60 percent of its 30,000 share allocation.
  

The initial offering price is $35 per share. There is a strong after market, and the stock goes to $36.00 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for $37.20. He is content to place his shares in a lock box and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at $34.10.

  
a. Compute the total dollar profit or loss on Mr. Michaels’ shares one week, one month, and one year after the purchase. In each case, compute the profit or loss against the initial purchase price. (Do not round intermediate calculations and round your answers to 2 decimal places. Enter all amounts as a positive value.)
  

1 week_____|_____|_____

1 month_____|_____|_____

1 year_____|_____|_____

b. Also compute the percentage gain or loss from the initial $30 price. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Enter all amounts as a positive value.)

1 week ___ | ____ |____

1 month ____|____|_____

1 year____|____|____|

Explanation / Answer

a) The total share allocated to michael is 1.6% of 30000 shares that is allocated to his brokers firm.So, the number of shares michael have is 480 (30000*1.6%).The total doller profit or loss at particular times on Michael shares against the initial price if the initial offering price given in the question is $35 are :

After 1 week = ($36 - $35)*480 shares = $480(Profit)

After 1 month = ($37.20 - 35)* 480 shares = $1,056 (Profit)

After 1 year = ($34.10 - 35) * 480 shares = $432 (Loss)

b) Computation of the percentage gain or loss when the initial price is $30. The percentage of gain or loss can be calculated as - gain or profit / initial price * 100

So,

After 1 week profit = $36 - $30 = $6 (gain)

gain percent = $6/$30 * 100 = 20%

After 1 month = $37.20 - 30 = $7.20(gain)

Gain Percent = $7.20/$30 * 100= 24%

After 1 year = $34.10 - $30 = $4.10(gain)

gain percent = 4.10/30 * 100 = 13.67%

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