IPO's, Underpricing & Winner's Curse: Example

Firms A and B both have announced an IPO; each firm's stock will be sold at $10 per share. One the firms is undervalued by $1, while the other is overvalued by $0.50, but you are unable to determine which of them is undervalued and which of them is overvalued. Informed investors, like big banks and pension funds are able to make this distinction. You plan to buy 100 shares of each. If an issue is rationed, you will be able to purchase only half of your order.

If you are able to buy 100 shares of each firm's stock, what is your profit?

For which of the two IPO's would you expect to be rationed given that other investors have better information, and hence know how to distinguish between the two issues?

What profit do you expect in reality?

What is the average underpricing?

What is your expected profit if the undervalued stock is undervalued by $0.50, everything else being  the same?

What is in this case the average underpricing?

Why do we have a winner's curse in this situation?

What is the expected profit if the undervalued stock is undervalued by $1.50, everything else bing the same?

What is the average underpricing now?

Does it make sense to underprice by this much if the goal of the firm is a) to get you interested in the IPO, and b) to minimize its losses.

Rights Offering Example

The Pitt-Panther Corporation has announced a rights offering to obtain $10 million of equity financing for a new project. The stock currently sells for $80 per share; there are 2 million shares outstanding.

If Pitt-Panther sets the subscription price at $20 per share, how many shares must be sold?

How many rights are required in order to buy one share?

What is the ex-rights price?

What is the value of a right?
 
Suppose you own 100 shares, but intend  to sell the rights, instead of exercising the rights and buy new shares. Is this a good decision?

What if you decide to exercise your rights, does this affect your total value?

If the rights are trading at $10 per right, how will this affect you if you own 100 shares and what would you recommend to someone who does not own shares?

How about if they trade at $13 per right?

What would be the minimum current share price (including the right) for you to be interested in buying rights at $13 each?

Pin = Price including rights
Pex = Price excluding rights


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