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

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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.
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This note was uploaded on 11/03/2009 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue University-West Lafayette.

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

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