You are bullish on Telecom stock. The current market price is $80 per share, and

Question

You are bullish on Telecom stock. The current market price is $80 per share, and you have $9,000 of your own to invest. You borrow an additional $9,000 from your broker at an interest rate of 9% per year and invest $18,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 8% during the next year? The stock currently pays no dividends. (Negative value should be indicated by a minus sign. Round your answer to the nearest whole number. Omit the "%" sign in your response.) Rate of return % b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately. (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Margin call will be made at price $ or lower

Explanation / Answer

Calculation of Rate of Return

Amount Borrowed (@9%) = $9,000

Interest Paid = 9,000*9% = $810

Amount Invested = $18,000

Return Generated = $18,000 * 8% = $ 1,440

Net Return (after interest expenses) = $1,440 - $810 = $630

Own money Invested = $9,000

Rate of Return = 630/9,000 = 7%

Calculation of Margin Call

Price of the Stock = $80

Maintenance Margin = 30%

Price at which margin call gets initiated = $80 * 30% = $24

Thus, the margin call will be made at a price of $24 or lower

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