Question

Currently the price of Mattco stock is $30 a share. You have $30,000 of your own funds to invest. Using 80% maximum margin allowed, what is your percentage profit or loss under the following situations (ignore dividends and taxes)? What would the percentage profit or less be in each situation if margin were not used?

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​​a. ​you purchase the stock and it rises to $33 a share

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​​b. you purchase the stock and it falls to $23 a share

Answer 1

a. when price rises to $33

1- by using maximum margin

Total no.of shares purchased = (30,000/80%) / 30 = 1250

So profit % = (1250*33 - 1250*30) / 1250*30 = 10%

2. when margin not used

No.of share = 30,000/30 = 1000

profit % = 1000*33 - 1000*30 / 30,000 = 10%

b. When price falls to $23

1. with margin

profit % =( 23*1250 - 30*1250) / 1250*30 = -23.33%

2. without margin = 23*1000 - 30*1000 / 30,000 = -23.33%

So we can see a fact that profit percentage is same when the margin is utalized and when not.