Jake and Jhenna are considering buying 200 shares of stock ABC each. ABC stock is currently selling
Question:
Jake and Jhenna are considering buying 200 shares of stock ABC each. ABC stock is currently selling for $75. Jake wants to buy the 200 ABC stocks using $9,000 of his own money and borrowing the remainder amount of the purchase from her broker. Jake's broker will be charging him 10% on the margin loan. Jhenna wants to buy the 200 ABC stocks by paying the full amount of the purchase from her own money.
a. How much money does Jhenna need to pay in order to purchase the 200 ABC stocks?
b. How much money does Jake need to borrow from his broker in order to purchase the 200 ABC stocks?
c. What is Jake's initial margin ratio? (2pts)
d. If the stock price declines immediately to $60, what will be Jake's new margin ratio?
e. Given that the minimum margin requirement is a 30% margin ratio. What is the maximum level that stock ABC price can drop into without triggering a margin call?
f. Assume that after one year stock ABC price is equal to $100 and stock ABC did not pay any dividend during the year. What will be Jake's return? (2pts)
g. Assume that after one year stock ABC price is equal to $100 and stock ABC did not pay any dividend during the year. What will be Jhenna's return?
h. Assume that after one year stock ABC price is equal to $50 and stock ABC did not pay any dividend
during the year. What will be Jake's return?
i. Assume that after one year stock ABC price is equal to $50 and stock ABC did not pay any dividend
during the year. What will be Jhenna's return?
j. Whose position is riskier, Jake's or Jhenna's?
Suppose that you want to sell short 500 shares of stock XYZ. XYZ stock is currently selling for $120.
Broker A has a 32% initial margin requirement whereas broker B wants you to deposit $25,000 to satisfy the margin requirement.
a. How much cash or cash equivalent, do you have to deposit if you decide to do short sale withbroker A?
b. If you are to do the short sale with broker B, what would be broker B initial margin requirement?
Expert Answer:
a Jhenna needs to pay the full amount of the purchase which is 200 shares x 75share 15000 b Jake will be using 9000 of his own money so he needs to bo... View the full answer
