a.
Introduction:
To compute: Rate of return after 1 year if company X’s stock is sold.
b.
Introduction:A margin account is a brokerage account that allows an investor to borrow fund to purchase securities. Brokers charge an interest rate on the money which is bowered by investor.
To identify: Company X’s price before getting a margin call.
c.
Introduction: Rate of return is the profit or loss on an investment during a period of time. A short position is a technique used by the trader expected that the value of stock will reduce in forthcoming.
To analyze: Rate of return and rise in price.
Want to see the full answer?
Check out a sample textbook solutionChapter 3 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
- Suppose that you sell short 1000 shares of Xtel, currently selling for $50 per share, and give your broker $40,000 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) $55; (ii) $50; (iii) $46? Assume that Xtel pays no dividends. (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 high can Xtel’s price rise before you get a margin call? (Round your answer to 2 decimal places.) c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $2 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)arrow_forwardYou sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)arrow_forwardYou sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, how much money you need to put up initially? At what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends)arrow_forward
- You think that the stock of Fleetwood Corp is likely to rise within the next six months from its current price ($19.00 bid and $20.00 ask), and you want to maximize the amount of profit from your investment. So, you will use a margin account to borrow on margin in order to buy as many shares as you can. Your initial margin requirement is 45%, and you have $90,000 of your own money to invest in the shares. The minimum (maintenance) margin is 30%, and Fleetwood does not pay dividends. (Ignore interest for this problem.) If you buy Fleetwood on margin with the maximum margin loan, what is the maximum number of shares you can buy? Suppose you bought the maximum number of shares of Fleetwood as in (1). Assume that immediately after your purchase, Fleetwood’s share price drops to $18.00 per share. Calculate your new margin. Will you receive a margin call? How far can the price drop before you will receive a margin call? If the stock price falls to $14.00, you calculate that you would…arrow_forwardYou have borrowed $45,000 on margin to buy shares in Tencent, which is now selling at $120 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 30%. Two days later, the stock price falls to $105 per share. a. What is the current margin and will you recieve a margin call? b. How low can the price of the shares fall before you recieve a margin call?arrow_forwardYou sell short 300 shares of Microsoft which are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account what will be your rate of return after one year if Microsoft is selling at $27? (Ignore any dividends)arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT