b.
The value of the 200 shares is 200P.
Equity is (200P – $5,000).
You will
receive a margin call when:
P
200
000
,
5
$
P
200
−
= 0.30
⇒
when P = $35.71 or lower
8.
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, net worth 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
9.
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 net worth of $15,000.
a.
(i)
Net worth increases to: ($44
×
500) – $5,000 = $17,000
Percentage gain = $2,000/$15,000 = 0.1333 = 13.33%
(ii)
With price unchanged, net worth is unchanged.
Percentage gain = zero
(iii)
Net worth 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
3-3