Gordon Gekko purchased 21m shares of BlueStar (BST) through share & option trans

Question

Gordon Gekko purchased 21m shares of BlueStar (BST) through share & option transactions facilitated by Jackson & Steinham at an average price of $24.25 per share. His broker Bud Fox ‘hangs him out in the wind to twist’ by selling BST to Sir Larry Wildman for only $16.40 a share! If Gekko & Co. paid only 45% of the initial purchase price in cash, and borrowed the rest on margin (ignoring 2% principal leverage fees & 0.25% trading fees otherwise paid to Jackson & Steinham), what % of Gekko’s initial capital has been wiped out? How much lower is his holding period return (HPR) using leverage, versus paying for BST in cash?

A. Capital wiped out: 75.69%; HPR -31.96%

B. Capital wiped out: 71.94%; HPR -39.56%

C. Capital wiped out: 75.69%; HPR -39.06%

D. Capital wiped out: 71.94%; HPR -39.06%

E. Capital wiped out: 71.02%; HPR -39.56%

F. Capital wiped out: 71.02%; HPR -31.96%

Explanation / Answer

Purchase Price = $24.25

Selling Price =$16.40

Initial Amount Paid by Self = 0.45x24.25 =$10.9125

Loss made on Transaction =$24.25-16.40 =$7.85

Capital Wiped Out =7.85/10.9125x100 =71.94%

Holding Period Return if he would have paid in cash = -7.85/24.25x100 = -32.37%

Difference in Holding Period Returns =-71.94 - (-32.27) = -39.56%

Hence, Option-b is the right answer.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.