There are two stocks: Totally Fake Stock (TFS) and Imaginary Industries Inc. (III). Both stocks are...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
There are two stocks: Totally Fake Stock (TFS) and Imaginary Industries Inc. (III). Both stocks are trading at $100 / share. Alicia and Bashir each have $10,000 in their respective margin accounts. Minimum margin is 30%. Interest on cash balances (positive or negative) is 0.5% effective monthly rate. Stock borrow fees are 0.1% effective monthly rate. Interest is calculated based on the balance at the start of each month and credited/charged at the end of each month. Alicia and Bashir both think that TFS will go up and III will go down. Alicia buys 100 shares of TFS and Bashir shorts 100 shares of III at time t = 0 (time measured in months). They are both correct about what happens with the two stocks: TFS in- creases in value by 1% each month and III decreases in value by 1% each month for the next 6 months. a) Neglecting interest rates (on both cash balances and stock loans) and commissions, guess who's account is worth more at the end of 6 months. Verify your guess by computing the net mark to market for each of them. Present your answers by filling out the spreadsheet A1Template! b) This time taking into account interest rates on both cash balances and stock loans (but still not commissions), guess who's account is worth more at the end of 6 months. Verify your guess by computing the net mark to market for each of them. c) This time Alicia uses as much leverage as possible by buying on margin. The minimum margin requirement is 30%. How many shares can she buy (to the nearest 100 shares)? How much is her margin loan? How much is her account worth at the end of 6 months (including interest but not commissions)? Month 123456 Interest rate on cash: Stock borrow rate: Monthly return on TFS: Monthly return on Ill: 0.00% (effective monthly rate). 0.00% (effective monthly rate) 0.00% 0.00% Share Value of Number of Shares TFS Price shares 100 $100.00 $10,000.00 Interest on Stock Loan Alicia Interest on Cash Cash $0.00 Total Loan (Cash + Stock) Margin Ratio Net mtm $0.00 1.000 $10.000.00 Month 0 1 2 3 4 5 6 Number of Shares III -100 Value of Share Price shares $100.00 $10,000.00 Interest on Stock Loan Bashir Interest on Cash Cash $20,000.00 Total Loan (Cash + Stock) Margin Ratio Net mtm -$10,000.00 1.00 $10,000.00 There are two stocks: Totally Fake Stock (TFS) and Imaginary Industries Inc. (III). Both stocks are trading at $100 / share. Alicia and Bashir each have $10,000 in their respective margin accounts. Minimum margin is 30%. Interest on cash balances (positive or negative) is 0.5% effective monthly rate. Stock borrow fees are 0.1% effective monthly rate. Interest is calculated based on the balance at the start of each month and credited/charged at the end of each month. Alicia and Bashir both think that TFS will go up and III will go down. Alicia buys 100 shares of TFS and Bashir shorts 100 shares of III at time t = 0 (time measured in months). They are both correct about what happens with the two stocks: TFS in- creases in value by 1% each month and III decreases in value by 1% each month for the next 6 months. a) Neglecting interest rates (on both cash balances and stock loans) and commissions, guess who's account is worth more at the end of 6 months. Verify your guess by computing the net mark to market for each of them. Present your answers by filling out the spreadsheet A1Template! b) This time taking into account interest rates on both cash balances and stock loans (but still not commissions), guess who's account is worth more at the end of 6 months. Verify your guess by computing the net mark to market for each of them. c) This time Alicia uses as much leverage as possible by buying on margin. The minimum margin requirement is 30%. How many shares can she buy (to the nearest 100 shares)? How much is her margin loan? How much is her account worth at the end of 6 months (including interest but not commissions)? Month 123456 Interest rate on cash: Stock borrow rate: Monthly return on TFS: Monthly return on Ill: 0.00% (effective monthly rate). 0.00% (effective monthly rate) 0.00% 0.00% Share Value of Number of Shares TFS Price shares 100 $100.00 $10,000.00 Interest on Stock Loan Alicia Interest on Cash Cash $0.00 Total Loan (Cash + Stock) Margin Ratio Net mtm $0.00 1.000 $10.000.00 Month 0 1 2 3 4 5 6 Number of Shares III -100 Value of Share Price shares $100.00 $10,000.00 Interest on Stock Loan Bashir Interest on Cash Cash $20,000.00 Total Loan (Cash + Stock) Margin Ratio Net mtm -$10,000.00 1.00 $10,000.00
Expert Answer:
Answer rating: 100% (QA)
a Neglecting interest rates and commissions Time Alicias TFS Shares Market Price of TFS Value of Alicias Position Bashirs III Shares Market Price of I... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Find the inverse of each of the given matrices by the method of Example 1 of this section. Data from Example 1 Find the inverse of the matrix First, we interchange the elements on the principal...
-
Extend the vocabulary from Section 8.4 to define addition for n-bit binary numbers. Then encode the description of the four-bit adder in Figure and pose the queries needed to verify that it is in...
-
If two countries had identical term structures of interest rates, what is the expected future exchange rate change between the two currencies?
-
Fuel economy leaders for the category of small sport utility vehicles include the Hyundai all-electric vehicle, Kona Electric, at 120 miles per gallon of gasoline equivalent (MPGe) and the Ford...
-
Employees of Georgia-Atlantic are permitted to contribute a portion of their earnings (in increments of $500) to a flexible spending account from which they can pay medical expenses not covered by...
-
Single Payment Compound Amount Factor A person deposits Rs . 5 0 , 0 0 0 at an interest rate of 1 8 % compounded annually for a period of 1 0 years. Find the maturity value after 1 0 years.
-
Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the...
-
Great Auto Repair (GAR) wants to expand its business significantly by adding an auto assembly plant at a cost of 100 million. The land for the plant, valued at 10 million, will be provided by GAR....
-
A company reports an accounting loss of \(\$ 75,000\). Depreciation for the year was \(\$ 216,000\), and CCA was \(\$ 321,000\). The company wishes to maximize its tax loss. How much is the tax loss?
-
If a publicly held entity declines to include in its financial report supplementary information required by the FASB, the auditor should issue a. Either an adverse opinion or an except for qualified...
-
Scarlett Corporation reported accounting income before taxes as follows: \(20 \mathrm{X} 4, \$ 150,000 ; 20 \mathrm{X} 5, \$ 92,000\). Taxable income for each year would have been the same as pre-tax...
-
Agnew Corporation started operations in \(20 X 1\). The company acquired equipment in the first year for a price of \(\$ 90,000\). The equipment will be depreciated for accounting purposes over three...
-
Rundle Corporation acquired new equipment for \(\$ 400,000\) in \(20 \mathrm{X} 4\). For accounting purposes, the equipment will be depreciated over four years, straight-line, with a full-year's...
-
3. Take the following list [748, 233, 73, 581, 157, 92, 940, 670, 194] and a. Print the first three items from the list. b. Print the middle three items from the list. c. Print the last three items...
-
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.78 and Kr 5.86, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate...
-
Simmons Enterprises is a boutique guitar manufacturer. The company produces both acoustic and electric guitars for rising and established professional musicians. Vanessa Aaron, the company's sales...
-
E. Cain, Ltd. produces decorative lamps in several styles and finishes. The company uses a job order costing system to accumulate product costs. Because much of the production process is automated,...
-
Pletzke Company manufactures dental instruments. The company's product line includes products as simple as dental picks and products as complex as panoramic x-ray machines. Carol Lindquist, a senior...
-
A blank income statement for Wightmans Lumber is included in the Working Papers. 1. Use the following information to prepare Wightman Lumbers January income statement reporting contribution margin....
-
An income statement for Cheries Pizza is included in the Working Papers. 1. Use the following information to calculate the breakeven point in sales dollars and unit sales for July. The August...
-
Use the working papers and data from Work Together 15-2. Forms for completing this Work Together are provided in the Working Papers. Your instructor will guide you through the following examples. 1....
Study smarter with the SolutionInn App