Question

Barbara buys 120 shares of DEM at $27.00 a share and 230 shares of GOP at $37.00 a share. She buys on margin and the broker charges interest of 12 percent on the loan.

If the margin requirement is 43 percent, what is the maximum amount she can borrow? Round your answer to the nearest cent.

If she buys the stocks using the borrowed money and holds the securities for a year, how much interest must she pay? Round your answer to the nearest cent.

If after a year she sells DEM for $18.00 a share and GOP for $32.00 a share, how much did she lose on her investment? Use a minus sign to enter the amount as a negative value. Round your answer to the nearest cent.

What is the percentage loss on the funds she invested if the interest payment is included in the calculation? Use a minus sign to enter the amount as a negative value. Round your answer to two decimal places.

Answer 1

a). Total Investment = No. of shares * Share Price

= [120 * $27] + [230 * $37]

= $3,240 + $8,510 = $11,750

Barbara's own money = Total Investment * Margin Required = $11,750 * 0.43 = $5,052.50

Loan Amount = Total Investment - Barbara's own money = $11,750 - $5,052.50 = $6,697.50

b). Interest Paid = Loan Amount * Interest Rate = $6,697.50 * 0.12 = $803.70

c). Total Sold Value = No. of shares * Share Price

= [120 * $18] + [230 * $32]

= $2,160 + $7,360 = $9,520

Profit(Loss) = Total Sold Value - Total Investment - Interest Paid

= $9,520 - $11,750 - $803.70 = -$3,033.70

d). Percentage loss on investment = Loss on the investment / Barbara's money

= -$3,033.70 / $5,052.50 = -0.6004, or -60.04%