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's Week 6-#3-1 - Stock Market and Tax Combined Question ABC...

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ABC is currently selling at $30 per share. You have $7,500 to invest and you can afford the initial commission to get the transaction started. You instruct your broker that you wish to invest in ABC utilizing the full margin available. The minimum margin requirement is 50%. Annual interest is 10% on margin accounts, payable at the close of the transaction. 2 months later the price of ABC has dropped to $25 per share, and you receive a margin call which you meet later that day. ABC declares and pays dividends of $2 per share which you deposit to your investment cash account. Stock Market and Tax Combined Question
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3 months later the price rises to $37 per share. You decide to sell your holdings of ABC and use the cash balance in your account to sell short XYZ. The last 3 prices at which XYZ has traded are $27, $25.5 and $26. Your broker will sell the stocks short at a price in accordance with the ‘last sale’ rule. 1 month later, the price of XYZ declines to $21 per share. You instruct your broker to take the excess in your short account and buy LMN April 33 Calls. You buy the calls at a premium that reflects both the intrinsic value and $2 of time value. LMN is currently trading at $36 per share.
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2 months later, the price of XYZ drops to $20 and you decide to cover your short position. At the same time, the price of LMN rises to $40. It is your opinion that this is the highest price that LMN will trade at before the option expires. What is your annualized after-tax yield on each of these investments this year? Your taxable income from all other sources is $62,500.
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Combined Problem: Solution ABC is currently selling at $30 per share . You have $7,500 to invest and you can afford the initial commission to get the transaction started. You instruct your broker that you wish to invest in ABC utilizing the full margin available. The minimum margin requirement is 50%. Interest is 10% , payable at the close of the transaction.
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