Problem 2-14 Margin and Leverage (LO3, CFA4)

Suppose you purchase 1,200 shares of stock at $34 per share with an initial cash investment of $20,400. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Ignore dividends.

a.Calculate your return on investment one year later if the share price is $42. Suppose instead you had purchased $20,400 of stock with no margin. What would your rate of return have been now?(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

with margin =

without margin=

b.Calculate your return on investment one year later if the share price is $34. Suppose instead you had purchased $20,400 of stock with no margin. What would your rate of return have been now?(A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

with margins=

without margins=

c.Calculate your return on investment one year later if the share price is $18. Suppose instead you had purchased $20,400 of stock with no margin. What would your rate of return have been now?(A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

with margins=

without margins=