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Exam 1 Review - Exam1Review FIN4504 A.Gubin IPOUnderpricing...

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Exam 1 Review FIN 4504 A. Gubin
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IPO Underpricing Urban’s Trophies has decided to hire an investment banker to help take it  public.  After talking with some regular clients who are experts in the  trophy business, the underwriter decides that the true value of the firm's  equity will be $30 million with probability 0.35 and $80 million with  probability 0.65.  The underwriter has decided to sell 5 million shares, but  also needs to compute the appropriate offer price.  There is a group of  uninformed investors willing to submit bids for 6 million shares of this  IPO as long as their expected profit is not negative.  These uninformed  investors know the probability distribution of firm values stated above, but  do not know the true value of Urban’s Trophies as informed investors do.  
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