Question

Assume that you buy 2 shares of Facebook Inc. at $220 per share, putting up a 50% margin.

i) How much equity funds do you need to provide to make this margin transaction? What is the borrowed amount in this transaction?

ii) If the stock price falls to $200 per share, what is your new margin position?

iii) What is your rate of return (return on equity) in (ii)? What would your rate of return in (ii) be if the transaction was without margin (100% equity)?

iv) Explain the main advantages and disadvantages of this margin transaction for you as investor.

Answer #1

You purchased 200 shares of Facebook common stock on margin at
$210 per share. Assume the initial margin is 50% and the
maintenance margin is 30%. Three days later, the stock price falls
to $190 per share.
Will you receive a margin call? (15 points)
Below what stock price level would you get a margin call?
Assume the stock pays no dividend; ignore interest on margin. (15
points)

Suppose that Xtel currently is selling at $56 per share. You buy
500 shares using $20,000 of your own money, borrowing the remainder
of the purchase price from your broker. The rate on the margin loan
is 6%.
a. What is the percentage increase in the net
worth of your brokerage account if the price of Xtel
immediately changes to: (i) $58.80; (ii) $56; (iii)
$53.20? What is the relationship between your percentage return and
the percentage change in the...

You short-sell 400 shares of XYZ Co., now selling for $100 per
share. You post the 50% margin required on the short sale. If the
share price falls to $90 per share and you close your short
position, what is your holding-period return on the transaction?
(Assume the stock pays no dividends, and there is no interest paid
on the posted margin.)

You purchased 3000 shares of Microsoft common stock on margin at
$80 per share. Assume the initial margin is 70%, and the
maintenance margin is 30%. What will be your initial position? If
the share price falls below to $50 per share, what will be your new
position and percentage of margin?

Suppose that LMN stock currently is selling at $52 per share.
You buy 500 shares using $20,000 of your own money, borrowing the
remainder of the purchase price from your broker. The rate on the
margin loan is 9%.
a. What is the percentage increase in the net
worth of your brokerage account if the price of LMN
immediately changes to: (i) $56.68; (ii) $52; (iii)
$47.32? What is the relationship between your percentage return and
the percentage change in...

Suppose that you just short sold 100 shares of Quiet Minds stock
for $67.00 per share.
a. If the initial margin requirement is 50%,
how much equity must you invest? (Round your answer to the
nearest dollar)
Equity
$
b. Construct the balance sheet that corresponds
to the transaction.
Assets
Liabilities and Equity
Stock
$
Short position (100 shares)
$
T-bills
$
Equity
$
Total assets
$
Total liabilities and equity
$
c. Now suppose the price of the stock...

Suppose that you buy 450 shares of stock at an initial price of
$50 per share. The stock pays a dividend of $0.52 per share during
the following year, and the share price at the end of the year is
$52. Calculate the following:
The capital gains yield for the year
The dividend yield
The total rate of return on the investment for the holding
period
The total dollar return for the year
(5 points) Assume that the return of...

Assume you want to buy 100 shares of stock at $50 per share
because you feel it will rise to $60 within 3 months. The stock
pays $4 per share in annual dividends. You are going to buy the
stock with 70% margin and will pay 8.0% interest on the margin
loan.
Calculate the return if the price go up to $55 in 3 months.

You purchase 100 shares of a stock at $120 per share, on a
margin of 55 percent.
The stock declines to $90.
a.What is your initial margin position
(equity and loan)?
b.When the price declines to $90 per
share will you be called upon to put up more margin to meet the 35
percent minimum maintenance margin requirement?
If yes, how much equity would you need
to add to your account?
If no, how much equity do you have over...

You have just borrowed $67,500 on margin to buy shares in ABC,
which is currently quoting as the bid price of $29.99 bid and the
ask price of $30.00 ask per share. The minimum margin is 35%, and
your initial margin requirement is 55%. Assume that ABC will pay no
dividends before you return the loan and that that you pay no
interest on your loan.
If you buy ABC in margin, what is the maximum number of shares
you...

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