What Is Your Prediction For The Price Of Picc Tomorrow

mately one month and then sold. The investment rule he followed was to submit a purchase order for every firm commitment initial public offering of oil and gas exploration companies. There were 22 of these offerings, and he submitted a purchase order for approximately $1,000 in stock for each of the companies. With 10 of these, no shares were allocated to this assistant professor. With 5 of the 12 offerings that were purchased, fewer than the requested number of shares were allocated.

The year 1980 was very good for oil and gas exploration company owners: on average, for the 22 companies that went public, the stocks were selling for 80 percent above the offering price a month after the initial offering date. The assistant professor looked at his performance record and found that the $8,400 invested in the 12 companies had grown to $10,000, representing a return of only about 20 percent (commissions were negligible). Did he have bad luck, or should he have expected to do worse than the average initial public offering investor? Explain.

10. IPO Pricing The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow with a firm commitment initial public offering managed by the investment banking firm of Erlanger and Ritter. Answer the following questions:

a. Assume that you know nothing about PICC other than the information contained in the prospectus. Based on your knowledge of finance, what is your prediction for the price of PICC tomorrow? Provide a short explanation of why you think this will occur.

b. Assume that you have several thousand dollars to invest. When you get home from class tonight, you find that your stockbroker, whom you have not talked to for weeks, has called. She has left a message that PICC is going public tomorrow and that she can get you several hundred shares at the offering price if you call her back first thing in the morning. Discuss the merits of this opportunity.

PROSPECTUS PICC

200,000 shares PEST INVESTIGATION CONTROL CORPORATION

Of the shares being offered hereby, all 200,000 are being sold by the Pest Investigation Control Corporation, Inc. ("the Company"). Before the offering there has been no public market for the shares of PICC, and no guarantee can be given that any such market will develop.

These securities have not been approved or disapproved by the SEC nor has the commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

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