Question

Suppose that Weston (WN) currently is selling at $ 80 per share. You buy 250 shares, using $ 15,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8 percent. a. What is the percentage increase in the net worth of your brokerage account if the price of WN immediately changes to?
(i) $ 88;
(ii) $ 80;
(iii) $72? What is the relationship between your percentage return and the percentage change in the price of WN?
b. If the minimum margin is 30 percent, how low can WN’s price fall before you get a margin call?
c. How would your answer to (b) change if you had financed the initial purchase with only $10,000 of your own money?
d. What is the rate of return on your margined position (assuming again that you invest $ 15,000 of your own money) if WN is selling after one year at
(i) $ 88;
(ii) $ 80;
(iii) $72?
What is the relationship between your percentage return and the percentage change in the price of WN? Assume that WN pays no dividends.
e. Continue to assume that a year has passed. How low can WN price fall before you get a margin call?


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  • CreatedJune 21, 2015
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