Two friends each invested $20,000 of their own (equity) funds. Stan, being more conservative, purchased utility and manufacturing corporation stocks. Theresa, being a risk taker, leveraged the $20,000 and purchased a $100,000 condo for rental property. Considering no taxes, dividends, or revenues, analyze these two purchases by doing the following for 1 year after the funds were invested. (a) Determine the year-end values of their equity funds if there was a 10% increase in the value of the stocks and the condo. (b) Determine the year-end values of their equity funds if there was a 10% decrease in the value of the stocks and the condo. (c) Use your results to explain why leverage can be financially risky.
Two friends each invested $20,000 of their own
(equity) funds. Stan, being more conservative, purchased
utility and manufacturing corporation
stocks. Theresa, being a risk taker, leveraged the
$20,000 and purchased a $100,000 condo for rental
property. Considering no taxes, dividends, or revenues,
analyze these two purchases by doing the
following for 1 year after the funds were invested.
(a) Determine the year-end values of their equity
funds if there was a 10% increase in the value
of the stocks and the condo.
(b) Determine the year-end values of their equity
funds if there was a 10% decrease in the
value of the stocks and the condo.
(c) Use your results to explain why leverage can
be financially risky.
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