a. How many shares of Gentry Shoes can Lauren purchase using the maximum allowable margin?
b. What is Lauren’s profit (loss) if the price of Gentry’s stock
i. Rises to $45?
ii. Falls to $25?
c. If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will receive a margin call?
2. Suppose you buy a round lot of Margin Industries stock on 55 percent margin when the stock is selling at $20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the total stock value on both the purchase and sale. A year later, you receive a $0.50 per share dividend and sell the stock for 27. What is your rate of return on the investment?
3. You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of 56. Your broker tells you that your margin requirement is 45 percent and that the commission on the sale is $155. While you are short the stock, Charlotte pays a $2.50 per share dividend. At the ed of one year, you buy 100 shares of Charlotte at 45 to close out your position and are charged a commission of $145 and 8 percent interest on the money borrowed. What is your rate of return on the investment?
4. You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is selling for $45 a share.
a. If you put in a stop loss order at $40, discuss your reasoning for this action.
b. If the stock eventually declines in price to $30 a share, what would be your rate of return with and without the stop loss order?
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