EXAM 1 Problems_Solutions

EXAM 1 Problems_Solutions - EXAM 1 PROBLEMS B Short...

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EXAM 1 PROBLEMS B. Short answer (total 64 points): 13. ( 10 points ) The stock of Shamrock Corporation is selling at $28 a share. You place a market order to buy 100 shares of Shamrock. Immediately after your market order is executed, you place a stop-loss order for shares at $24 and a stop-buy limit order for $32. During the next three months, the stock price gradually declines to $20 and then slowly rises to $36. What is your net gain/loss and the rate of return on this investment? Ignore transaction costs and brokerage commissions. Note: Here we make two assumptions: 1) The total available amount is $2,800 2) Only 75 shared can be purchased when stop-buy order is executed Initial cost when you place a market order = $28 x 100 = $2,800. At $24 your stop-loss order gets executed (you sell when the price falls below the limit). The loss from this transaction is = 100 x (28 – 24) = $400. Then, when the stock price reaches again $32 your stop - buy order gets executed (you buy when the price rises above the limit). As the price rises to $36, the gain from this transaction is: 75 x (36 – 32) = $300. Here we assume that only $24 x 100 = $2,400 was available to you for your stop-buy order. In this case you would be able to purchase only 2,400/32 = 75 shares of Shamrock stock. The net gain/loss = -$400 + $300 = -$100. Return = -100/2800 = -0.03574, or -3.57% Note : If gain = loss = $400, the net result will zero.
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14. (15 points) You believe that Krispy Kreme Doughnuts, currently trading at $40 per share, is one of the most undervalued companies in the market. To take advantage of what you believe is a sure increase in the stock price you decide to buy as many shares as possible using a margin position. You place $10,000 in your margin account
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This note was uploaded on 09/25/2011 for the course FINA 4320 taught by Professor John during the Spring '11 term at Houston Baptist.

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EXAM 1 Problems_Solutions - EXAM 1 PROBLEMS B Short...

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