chap014solutions - Solutions to Chapter 14 Venture Capital,...

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Solutions to Chapter 14 Venture Capital, IPOs, and Seasoned Offerings 6. You should be suspicious. If the issue were underpriced, preferred customers would be likely to snap up the offering. If the underwriters have to aggressively market the issue to the general public, it could be a sign that more knowledgeable investors are staying away because they view the issue as overpriced. 7. a.Average underpricing can be estimated as the average initial return on the sample of IPOs: (7% + 12% – 2% + 23%)/4 = 10% b. The average initial return, weighted by the amount invested in each issue, is calculated as follows: Investment (Shares × price) Initial Return Profit (% return × investment) A $5,000 7% $350 B 4,000 12% 480 C 8,000 - 2% - 160 D 0 23% 0 Total $17,000 $670 Average return = $670/$17,000 = 0.0394 = 3.94% Alternatively, you can calculate average return as: % 94 . 3 %) 2 ( 000 , 17 000 , 8 % 12 000 , 17 000 , 4 % 7 000 , 17 000 , 5 = - × + × + × c.The average return is far below the average initial return for the sample of IPOs. This is because I have received smaller allocations of the best performing IPOs and larger allocations of the poorly performing IPOs. I have suffered the winner’s curse: On average, I have been awarded larger allocations of the IPOs
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chap014solutions - Solutions to Chapter 14 Venture Capital,...

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