THE CORPORATE FINANCE

CORPORATE FINANCE

Table of Contents
Answer 1)...................................................................................................................................2
Answer 2)...................................................................................................................................2
Answer 3)...................................................................................................................................2
Answer 4)...................................................................................................................................2
1).............................................................................................................................................2
2).............................................................................................................................................3
3).............................................................................................................................................3
4).............................................................................................................................................3
Answer 5)...................................................................................................................................4
References..................................................................................................................................5

Answer 1)
Under-pricing phenomenon is referred to as the practice in which the listing of the
initial public offering securities is done at a price that is lower than the real value or the
market value of the securities (IPO of old company) or the company (IPO of a new
company). There are various reasons for the performance of the IPO under-pricing. The
prime reason is the attracting the uninformed investors. There are several investors in the
market that do not have information regarding the worth of the shares being issued and do not
know what kind of company they are placing their investments in. The only goal is to earn
the returns; hence the under-pricing the IPO attracts such customers. As per the yet another
theory of investment back conflict theory, the under-pricing benefits the investment banks
who act as the underwriter to the issue, because the original under writing fees is not charged
much. Thus, the under writing is done to benefit such under writers (Sohail Khalid, Raheman,
Zakaria & Farhat, 2018).
Answer 2)
The under-price is denoted as the percentage change of offer price to market price as
seen on the end of the first trading day of the stock. The formula for the calculation of the
under-pricing of an IPO is stated as follows (Albada, 2020).
Under Price = (Market Price – Offered Price) / Offered Price
Answer 3)
By making a market means an investment banks has a price for buying the security as
well as selling the security. The investment banks hold the responsibility of either one
security, or a group of securities and they aim to earn the profits on the difference between