Suppose you purchase 1150 shares of stock at $82 per share with an initial cash
ID: 2812747 • Letter: S
Question
Suppose you purchase 1150 shares of stock at $82 per share with an initial cash investment of $47150. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Ignore dividends. a. Calculate your return on investment one year later if the share price is $90. Suppose instead you had simply purchased $47150 of stock with no margin. What would your rate of return have been now? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Rate of Return With margin Without margin b. Calculate your return on investment one year later if the share price is $82. Suppose instead you had simply purchased $47150 of stock with no margin. What would your rate of return have been now? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Rate of Return With margin Without marginExplanation / Answer
Answer a) In case of no margin,
No share purchased = $47150/$82 = 575 shares
Return = Change in price * no of shares= (90-82) *575= $ 4600
Return % = $ 4600/ $ 47150 =0.09756 = 9.76% .
Return = 9.76 % with no margin .
With margin
No share purchased = 1150 shares
Return = Change in price * no of shares= (90-82) *1150= $ 9200
Interest charged on margin funding =( 94300-47150) * (5+1.5)% = $2829
Net return = $9200 - $2829 =$ 6371
Return % = $ 6371 / $ 47150 = 13.51%
Return = 13.51% With margin
Answer b )
In case of no margin,
No share purchased = $47150/$82 = 575 shares
Return = Change in price * no of shares= (82-82) *575= $ 0
Return % = $0 / $ 47150 =0.09756 = 0% .
Return =0 % with no margin .
With margin
No share purchased = 1150 shares
Return = Change in price * no of shares= (82-82) *1150= $ 0
Interest charged on margin funding =( 94300-47150) * (5+1.5)% = $2829
Net return = $0 - $2829 =$ - 2829
Return % = $ -2829 / $ 47150 = -6%
Return = -6% With margin
Answer c)
In case of no margin,
No share purchased = $47150/$82 = 575 shares
Return = Change in price * no of shares= (66-82) *575= -$9200
Return % = -$9200 / $ 47150 =-19.52% .
Return =-19.52 % with no margin .
With margin
No share purchased = 1150 shares
Return = Change in price * no of shares= (66-82) *1150= $-18400
Interest charged on margin funding =( 94300-47150) * (5+1.5)% = $2829
Net return = -$18400 - $2829 =$ - 21229
Return % = $ -21229 / $ 47150 = -45.024%
Return = -45.02% With margin
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