Use the attached spreadsheet to answer the following question:

1. Suppose you buy 100 shares of stock initially selling for $50, borrowing 25% of the necessary funds from your broker; that is the initial margin on your purchase is 25%. You pay an interest rate of 8% on margin loans.

a. How much of our own money do you invest? How much do you borrow from your broker?

b. What will be your rate of return for the following stock prices at the end of a one-year holding period? (i) $40; (ii) $50; (iii) 60.

2. Repeat question 1 assuming your initial margin was 50%. How does the margin affect the risk and return of your position?