Question

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 %.

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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