Question

Suppose that Xtel currently is selling at $40 per share. You buy 500 shares using $15,000...

Suppose that Xtel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to (a) $44; (b) $40; (c) $36? (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.) a. Percentage gain % b. Percentage gain % c. Percentage gain %.

Homework Answers

Answer #1
a) Price of Xtel immediately changes to $44
Initial Net Worth $15,000.00
Borrowed Amt $5,000.00
Total investment = 500 shares x $40 $20,000.00
New Net worth = $44 x 500 shares - 5000 $17,000.00
Percentage Gain = ($17000 - $15000)/15000 13.33%
b) Price of Xtel immediately changes to $40
Initial Net Worth $15,000.00
Borrowed Amt $5,000.00
Total investment = 500 shares x $40 $20,000.00
New Net worth = $40 x 500 shares - 5000 $15,000.00
Percentage Gain = ($15000 - $15000)/15000 0.00%
c) Price of Xtel immediately changes to $36
Initial Net Worth $15,000.00
Borrowed Amt $5,000.00
Total investment = 500 shares x $40 $20,000.00
New Net worth = $36 x 500 shares - 5000 $13,000.00
Percentage Gain = ($13000 - $15000)/15000 -13.33%
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