Chapter 3

Chapter 3 - Chapter 3 Answer Key: Problem Sets: 11, 12,...

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Chapter 3 – Answer Key: Problem Sets: 11, 12, & 16 Problem Sets: 11. The total cost of the purchase is: $40 × 500 = $20,000 You borrow $5,000 from your broker, and invest $15,000 of your own funds. Your margin account starts out with equity of $15,000. a. (i) Equity increases to: ($44 × 500) – $5,000 = $17,000 Percentage gain = $2,000/$15,000 = 0.1333 = 13.33% (ii) With price unchanged, equity is unchanged. Percentage gain = zero (iii) Equity falls to ($36 × 500) – $5,000 = $13,000 Percentage gain = (–$2,000/$15,000) = –0.1333 = –13.33% The relationship between the percentage return and the percentage change in the price of the stock is given by: % return = % change in price × equity initial s Investor' investment Total = % change in price × 1.333 For example, when the stock price rises from $40 to $44, the percentage change in price is 10%, while the percentage gain for the investor is: % return = 10% × 000 , 15 $ 000 , 20 $ = 13.33% b. The value of the 500 shares is 500P. Equity is (500P – $5,000). You will receive a margin call when: P 500 000 , 5 $ P 500 = 0.25 when P = $13.33 or lower
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c. The value of the 500 shares is 500P. But now you have borrowed $10,000
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Chapter 3 - Chapter 3 Answer Key: Problem Sets: 11, 12,...

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