You are bullish on Telecom stock. The current market price is $250 per share, an

Question

You are bullish on Telecom stock. The current market price is $250 per share, and you have $21,000 of your own to invest. You borrow an additional $21,000 from your broker at an interest rate of 7% per year and invest $42,000 in the stock. What will be your rate of return if the price of Telecom stock goes down by 8% during the next year? The stock currently pays no dividends. (Negative value should be indicated by a minus sign. Round your answer to the nearest whole number. Omit the "%" sign in your response.) How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Cost of Borrowing = 21,000 x 7% = $1,470

Total Shares = 42,000 / 250 = 168

Price of the shares in the next Year = 250 x 1.08 = $270

Total Gain = 270 - 250 = 20 x 168 = $3,360

Less: 3,360 - 1,470 = $1,890

Rate of Return = 1,890 / 21,000 = 9%

b. Calculation of Maintenance Margin:

Price = 250

Margin requirement = 30%

Margin = 250 x 30% = $75

So, if price fall below 175 (250 - 75), then there will be a maintenance call.

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