Investor A makes a cash purchase of 100 shares of AB&C common stock for $78 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $9 a share are distributed. Commissions are 3 percent of the value of a purchase or sale; the margin requirement is 75 percent, and the interest rate is 12 percent annually on borrowed funds. What is the percentage earned by each investor if he or she sells the stock after one year for (a) $69 and (b) $83? If the margin requirement had been 45 percent, what would have been the annual percentage returns? What conclusion do these percentage returns imply?
Investor A makes a cash purchase of 100 shares of AB&C common stock for $78 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $9 a share are distributed. Commissions are 3 percent of the value of a purchase or sale; the margin requirement is 75 percent, and the interest rate is 12 percent annually on borrowed funds. What is the percentage earned by each investor if he or she sells the stock after one year for (a) $69 and (b) $83? If the margin requirement had been 45 percent, what would have been the annual percentage returns? What conclusion do these percentage returns imply?
Chapter2: The Domestic And International Financial Marketplace
Section: Chapter Questions
Problem 2P
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Investor A makes a cash purchase of 100 shares of AB&C common stock for $78 a share.
Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year,
during which dividends of $9 a share are distributed. Commissions are 3 percent of the value of
a purchase or sale; the margin requirement is 75 percent, and the interest rate is 12 percent
annually on borrowed funds. What is the percentage earned by each investor if he or she sells
the stock after one year for (a) $69 and (b) $83?
If the margin requirement had been 45 percent, what would have been the annual percentage
returns? What conclusion do these percentage returns imply?
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