21. Yo u are bullish on Telecom stock. The current market price is $57 per share

Question

21. Yo u are bullish on Telecom stock. The current market price is $57 per share, and you have $8,550 of your own to invest. You borrow an additional $8,550 from your broker at an interest rate of 8% per year and invest S 17,100 in the stock. What will be yourrate of return if the price of Telecom stock goes up by 5.5% during the next year? (Ignore the expected dividend.) A)3.00% B)6.00% C)8.50% D) 10.50% 22. Continued from the above question, 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.) A) $40.71 B) $42.95 C) $43.97 D) $81.43

Explanation / Answer

21. rate of return = new value of stock - older value - interest / own investment

new value = 17100 + (17100*1.055)= 18040.5

interest = .08 * 8550 = 684

rate of return = 18040.5 - 17100 - 684 / 8550 = .03 or 3%

22.

A) value = 40.71 * 300 shares = 12,213 (17100/57 = 300 shares)

maintenance margin = .30 * 12,213 = 3663.9

equity = 12,213 - 8550 (debt) = 3663

B)

value = 42.95 * 300 shares = 12,885 (17100/57 = 300 shares)

maintenance margin = .30 * 12,213 = 3865.5

equity = 12,885 - 8550 (debt) = 4335

C)

value = 43.95 * 300 shares = 13,185 (17100/57 = 300 shares)

maintenance margin = .30 * 12,213 = 3,955.5

equity = 13,185 - 8550 (debt) = 4,635

D)

value = 81.43* 300 shares = 24,429 (17100/57 = 300 shares)

maintenance margin = .30 * 12,213 = 7,328.7

equity = 24,429 - 8550 (debt) = 15,879

Answer is a (40.71) because the maintanence margin is equal to the equity, and price fall below which will lead to the maintenance margin being higher than the equity which will result in a margin call by the broker. ( interest expense is not included in the equity since the price fall is immediate and not after a year)

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