Question

It receives bids to buy shares from investors A through F. The number of shares each would buy and the price they offer to pay is below:

A: 100 shares $16/share

B: 300 shares $14/share

C: 200 shares $10/share

D: 100 shares $12/share

E: 100 shares $13/share

F: 400 shares $14/share

The corporation will sell 1,000 shares. What will be the IPO share price?

a) $14

b) $13

c) $12

d) $10

Answer 1

Answer: Option C is correct.

For the limit buy orders, sell price less than or equal to the buy order price gets executed.

If selling price is $10 for 1000 shares, the following orders will get executed:
200 shares $10/share
100 shares $12/share
100 shares $13/share
400 shares $14/share
200 shares out of 300 shares $14/share
Total quantity of shares=200+100+100+400+200=1000
Here, the seller will miss "100 shares $16/share" order, which means the seller won't get right price for selling.

So, the seller will rise the selling price to $12. The following orders will get executed:
100 shares $12/share
100 shares $13/share
400 shares $14/share
300 shares $14/share
100 shares $16/share
Total quantity of shares=100+100+400+300+100=1000

If selling price is $13 for 1000 shares, the following orders will get executed:
100 shares $13/share
400 shares $14/share
300 shares $14/share
100 shares $16/share
Total quantity of shares=100+400+300+100=900

In this case, the seller won't be able to sell all 1000 shares. If the selling price moves above the level of $13, less number of shares will get executed.

Therefore, if the seller sells the shares at a price or $12, all 1000 shares will get executed and the seller will also get a good price (that is above the lowest buy price).
So, IPO share price should be=$12