Question

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 price of Xtel? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

i. Percentage Gain ____%

ii. Percentage Gain ____%

iii. Percentage Gain ____%

b. If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Margin call will be made at price _____ or lower

c. How would your answer to (b) change if you had financed the initial purchase with only $14,000 of your own money? (Round your answer to 2 decimal places.)

Margin call will be made at price _____ or lower

d. What is the rate of return on your margined position (assuming again that you invest $20,000 of your own money) if Xtel is selling after 1 year at: (i) $58.80; (ii) $56; (iii) $53.20? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

i. Rate of return ___%

ii. Rate of return ___%

iii. Rate of return ___%

e. Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Margin call will be made at price _____ or lower

Answer 1