Robin wants to purchase 1,000 shares of Anatop, Inc., which is selling for $5 per share. Anatop does not pay dividends because all earnings are reinvested in the firm to maintain its successful R&D department. The brokerage firm will allow Robin to borrow funds with an initial margin requirement of 70 percent and a maintenance margin of 35 percent. The broker loan rate is 14 percent. Assume that Robin borrows the maximum allowed by the brokerage firm to purchase the Anatop stock.
a. How much of her own money must Robin provide to purchase 1,000 shares of Anatop?
b. To what price can Anatop drop before Robin will receive a margin call from her broker?
c. If the price of Anatop’s stock is $7.50 in one year, what rate of return would Robin earn from her investment position?
d. If the price of Anatop’s stock is $4 in one year, what rate of return wouldRobin earn from her investment position?