a.
To calculate: Percentage increase in the net worth of the brokerage account.
Introduction: A brokerage account refers to an investment account that allows the account holder to deposit money and execute the trade in the place of the customer.
a.
Answer to Problem 11PS
Percentage change in net worth if price changes to $22 is 13.33%
Percentage change in net worth if price changes to $20 is 0%
Percentage change in net worth if price changes to $18 is -13.33%
Explanation of Solution
Given Information:
Selling price per share: $20
Number of shares: 1,000
Initial investment: $15,000
If share price of X changes to $22
If share price of X changes to $20
If share price of X changes to $18
Working Notes:
Calculation of current net worth:
b.
To calculate: The price at which the margin call will be generated.
Introduction: A margin call occurs when an investor’s account has fallen below the maintenance margin requirement, and then the margin call occurs.
b.
Answer to Problem 11PS
Margin call will be generated when the price is $13.33 or lower.
Explanation of Solution
Given Information:
Maintenance margin: 25%
Computing the price at which margin call will be generated:
Price is denoted by P
The total value of shares is 1000P
The chances of getting a margin call increases when the equity of business gets decreased.
c.
To calculate: The price at which margin call will be generated.
Introduction: When an investor’s account has reduced to a certain amount which is equal to or less than the account’s maintenance margin, then the margin call occurs.
c.
Answer to Problem 11PS
Margin call will be generated when price is $13.33 or lower.
Explanation of Solution
Given,
Initial investment: $10,000
The total value of shares is 1,000P, (Here P denotes the price)
Now, the money of your own is reduced to $10,000 which means the borrowed amount is increased to $10,000.
d.
To calculate: The
Introduction: The return on investment is the total profit or loss of the initial investment using a margined position, which is calculated as a percentage change for analyzing the relationship between change in the price and return over the price.
d.
Answer to Problem 11PS
Return over the price if a price change to $22 is 10.67%
Return over the price if price changes to $20 is -2.67%
Return over the price if price changes to $18 is -16%
Explanation of Solution
Given Information:
Number of shares: 1,000
Initial investment: $15,000
Return over the price if Price of X changes to $22
Return over the price would be 10.67%
Return over the price if Price of X changes to $20
Return over the price would be -2.67%
Return over the price if Price of X changes to $18
Return over the price would be -16%
e.
To calculate:The price at which margin call occurs after year passed.
Introduction: When an investor’s account arrives at a point where the initial margin deposit is equal to or less than the loss, which reduces the initial margin then the margin call occurs.
e.
Answer to Problem 11PS
Lowest Price fall before margin call is $7.2
Explanation of Solution
Calculating margin ratio:
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Chapter 3 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
- Suppose that Xtel currently is selling at $52 per share. You buy 500 shares using $20,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 9%. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $56.68; (ii) $52; (iii) $47.32? What is the relationship between your percentage return and the percentage change in the price of Xtel? (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.) b. If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to (b) change if you had financed the initial purchase with only $13,000 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position…arrow_forwardSuppose that Brue currently is selling at $50 per share. You buy 900 shares using $36,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%. What is the rate of return on your margined position if Brue is selling after ONE year at (a)$56; (b)$50; and (c)$44?arrow_forwardSuppose that XTel currently is selling at $60 per share. You buy 1,000 shares using $48,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. Required:a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $66; (ii) $60; (ii) $54? (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.) b. If the maintenance margin is 20%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to requirement b would change if you had financed the initial purchase with only $30,000 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position (assuming again that you invest $48,000 of your own money) if XTel is selling…arrow_forward
- In you cash account, you buy 100 shares of XYZ Corporation at a price of $10 per share. Two months later, XYZ pays a dividend $0.21 per share. You sell all 100 shares of XYZ three months later at a price of $12 per share. If you wanted to lever up the returns of this trade, you could have executed it in your _____ account. A) cash B) margin C) brokerage D) bank If you borrowed 50% of the upfront investment amount, your return (in percent terms) would have been _____. A) 11.10 B) 22.10 C) 44.20arrow_forwardJason Momoa put up $18,000 to take a long position in XYZ stock with a price of $30. a) If the initial margin rate on the position is 60%, how many shares can you purchase? b) What dollar amount are you borrowing from the brokerage firm? Include workingarrow_forwardSuppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.arrow_forward
- Suppose that TSLA’s current share price is $20. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. Assume that the annual rate on the margin loan is 10%. What is the rate of return if you sell your TSLA shares after 1 year at $22? Assume that TSLA pays no dividends. 5% 10% 15% 20%arrow_forwardSuppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account. a. if you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: $22, $20, and $18? Assume that Xtel's pays no dividends. b. If the maintenance margin is 25%, how high can Xtel's price rise before you get a margin call? c. Redo parts a and b but now assume that Xtel has paid a year end dividend of $1 per share. The pruces in part a should be interpreted as ex-dividend, that is prices after the dividend has been paid.arrow_forwardSuppose that XTel currently is selling at $50 per share. You buy 800 shares using $30,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%. Required:a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $56; (ii) $50; (ii) $44? (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.) b. If the maintenance margin is 25%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to requirement b would change if you had financed the initial purchase with only $20,000 of your own money? (Round your answer to 2 decimal places.)arrow_forward
- Suppose you want to buy 10,000 shares of MegaWorld Corporation at a price of 4.00 You put up P10,000 and borrow the rest. What does your account balance sheet would look like? What is your margin? Supposed that in the previous problem you shorted 10,000 shares instead of buying. The initial margin is 60 percent. What does the account balance sheet look like?arrow_forwardYou purchase 2,000 shares of Nice Kick Group (NKG) at $45 per share by giving your broker $60,000 to establish your margin account and borrowing the rest from your broker. A year has passed (t=1), and NKG paid out a dividend of $2 per share. The maintenance margin is 25%. If you paid an interest at a rate of 8% on the funds you borrowed from your broker, what is the NKG price at which would trigger a margin call? A. $60.94 B. $36.25 C. $71.07 D. $18.93arrow_forwarda. Suppose you want to buy 10,000 shares of MegaWorld Corporation at a price of 4.00 You put up P10,000 and borrow the rest. What does your account balance sheet would look like? What is your margin? b. Supposed that in the previous problem you shorted 10,000 shares instead of buying. The initial margin is 60 percent. What does the account balance sheet look like?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning