The Woods Co. and the Garcia Co. have both announced IPOs at $76 per share. One of these is undervalued by $8, and the other is overvalued by $3, but you have no way of knowing which is which. You plan on buying 1,300 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled.
a) If you could get 1,300 shares in Woods and 1,300 shares in Garcia, what would your profit be?
Profit:
b) What profit do you actually expect?
Expected profit: