MGMT 411
Fall 2009
MGMT 411
Homework 2 Solutions
Chapter 3
5.
a.The stock is purchased for: 300
×
$40 = $12,000
The amount borrowed is $4,000. Therefore, the investor put up equity, or
margin, of $8,000.
b.
If the share price falls to $30, then the value of the stock falls to $9,000. By the end of
the year, the amount of the loan owed to the broker grows to:
$4,000
×
1.08 = $4,320
Therefore, the remaining margin in the investor’s account is:
$9,000

$4,320 = $4,680
The percentage margin is now: $4,680/$9,000 = 0.52 = 52%
Therefore, the investor will not receive a margin call.
c.
The rate of return on the investment over the year is:
(Ending equity in the account

Initial equity)/Initial equity
= ($4,680

$8,000)/$8,000 =

0.415 =

41.5%
8.
a.The buy order will be filled at the best limitsell order price: $50.25
b.The next market buy order will be filled at the nextbest limitsell order price:
$51.50
10.
a.Initial margin is 50% of $5,000 or $2,500.
b.Total assets are $7,500 ($5,000 from the sale of the stock and $2,500 put up for margin).
Liabilities are 100P. Therefore, equity is ($7,500 – 100P). A margin call will be issued
when:
P
100
P
100
500
,
7
$

= 0.30
⇒
when P = $57.69 or higher
CFA 2. (d) The broker will sell, at current market price, after the first transaction at $55 or
less.