Question

Sam has $50,000 to invest in ABC company, a stick selling for $80 a share. the initial margin requirement is 60 percent.

a. ignoring traces and commissions, calculate your rates of return uf the stock rises to $100 a share and if it declines to $60 a share assuming you pay cash for the stock.

b. ignoring traces and commissions, calculate your rates of return uf the stock rises to $100 a share and if it declines to $60 a share assuming you buy it using maximum margin.

Answer 1

  

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Answer a)

No of shares bought with cash = 50,000 / 80 = 625 shares

If Prices is 100

Return = Profit / Investment

= (100-80) * 625 / 50000

  = 25%

If Prices is 60

Return = Profit / Investment

= (60-80) * 625 / 50000

  = -25%

Answer b)

Total value available to invest = 50,000 / 0.60 = 83,333.33

No of shares to be bought = 83,333.33 / 80 = 1042

If Prices is 100

Return = Profit / Investment

= (100-80) *1042 / 50000

  = 41.68%

If Prices is 60

Return = Profit / Investment

= (60-80) *1042 / 50000

  = -41.68

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