Question

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 700,000 shares to be issued is very strong. His broker’s firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000-share allocation. The initial offering price is \(30 per share. There is a strong aftermarket, and the stock goes to \)32 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for \(33.50. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at \)28.50.

b. Also compute this percentage gain or loss from the initial $30 price.

Short answer

Answer

The percentage gain after one week is 6.675, after one week is 11.67% and percentage loss after one year is 5%.

Step-by-step solution

Information provided in the question

Share to be allotted = 25,000 shares

Initial offer price = $30 per share

Stock price after one week = $32 per share

Percentage provided by the broker = 1.3%

Calculation of percentage gain after one week

The percentage gain after one week is 6.67%.

$$\begin{gathered} \mathrm{Percentage}\mathrm{gain}=\frac{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times (\mathrm{CP}-\mathrm{IP})}{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times \mathrm{IP}} \\ =\frac{1.3\%\times 25,000\times (\$32-\$30)}{1.3\%\times 25,000\times 30} \\ =6.67\% \end{gathered}$$

Calculation of percentage gain after one month

The percentage gain after one month is 11.67%.

$$\begin{gathered} \mathrm{Percentage}\mathrm{gain}=\frac{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times (\mathrm{CP}-\mathrm{IP})}{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times \mathrm{IP}} \\ =\frac{1.3\%\times 25,000\times (\$33.50-\$30)}{1.3\%\times 25,000\times 30} \\ =11.67\% \end{gathered}$$

Calculation of percentage loss after one year

The percentage loss after one year is 5%.

$$\begin{gathered} \mathrm{Percentage}\mathrm{gain}=\frac{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times (\mathrm{CP}-\mathrm{IP})}{\mathrm{Percentage}\mathrm{provided}\mathrm{by}\mathrm{broker}\times \mathrm{Number}\mathrm{of}\mathrm{shares}\mathrm{allocated}\times \mathrm{IP}} \\ =\frac{1.3\%\times 25,000\times (\$28.50-\$30)}{1.3\%\times 25,000\times 30} \\ =5\% \end{gathered}$$