Harmony Shadwell wants to buy 200 shares of Google, which is currently selling i

Question

Harmony Shadwell wants to buy 200 shares of Google, which is currently selling in the market for $46 a share. Rather than liquidate all her savings, she decides to borrow through her broker. Assume that the margin requirement on common stock is 50%. If the stock rises to $66 a share by the end of the year, show the dollar profit and percentage return that Harmony would earn if she makes the investment with 50% margin. Contrast this to what she'd make if she uses no margin. Assume 9% interest on the borrowed money.

Calculate the dollar net Profit. Round the answers to the nearest dollar.

Calculate the return on investment. Round the answers to two decimal places.

Explanation / Answer

Since the margin requirement is 50 percent, this means that she will need enough money upfront to purchase only 100 shares, while the remaining 100 shares can be borrowed.

Total purchase = 46 x 300 = $13,800

margin paid = 13800/2 = $6,900.

Amount paid by Harmony = $6,900

final Price = 66 x 300 = $19,800

amount left after giving back margin money = 19800-6900 = $ 12,900

dollar profit = 12900-6900 = $6000 (with margin)

Net Profit/Return for Harmony % = (12900-6900)/6900 = 86.95% (with margin )

dollar profit = 19800-13800= $ 6000 (without margin)

Net profit/Return without margin = (19800-13800)/13800 = 43.47 % (without margin)

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