{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Homework 2 Solutions

# Homework 2 Solutions - MGMT 411 Fall 2009 MGMT 411 Homework...

This preview shows pages 1–2. Sign up to view the full content.

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 limit-sell order price: \$50.25 b.The next market buy order will be filled at the next-best limit-sell 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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 4

Homework 2 Solutions - MGMT 411 Fall 2009 MGMT 411 Homework...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online