Question

GPA PLUS Inc. stock sells today for $30/share. You buy 1000 shares with your own money. The stock
doesn’t pay a dividend.
a. What are the rates of return if the price immediately goes to $40, to $14?
b. Instead of buying all the shares with your own money, you borrow $10000 to finance the
purchase of 1000 shares at $30. What is your initial margin?
c. What are your rates of return on your portfolio with borrowing if the price immediately goes
to $40, to $14?
d. What do these latter results suggest relative to your rates of return the portfolio without
borrowing?
e. With borrowing, how much must the share price fall from $30 before you must add cash to
meet your maintenance margin of 30%?

Answer 1