Worksheet 2.1_ Ch2_FIN 334

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Embry-Riddle Aeronautical University *

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334

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Finance

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Jan 9, 2024

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Worksheet 2.1_ Chapter 2 Please solve the following questions. 1. You purchase 920 shares of 2nd Chance Co. stock on margin at a price of $45. Your broker requires you to deposit $25,000. a. What is your margin loan amount? Margin loan amount = $16,400 b. What is the initial margin requirement? Initial margin requirement is the percentage of the total cost that you must deposit initially. In this case, it's not explicitly given, so we can't calculate it without that information. 2. You purchase 270 shares of 2nd Chance Co. stock on margin at a price of $55. The initial margin requirement is 70 percent. a. Calculate the initial deposit. Initial deposit = $14,850 b. What would be the return if you had purchased the stock a) with margin and b) without margin under the following situations? i. Assume the stock price is $67 when you sell the stock. Return with margin = -$29,633 Return without margin = $52,150 ii. Assume the stock price is $38 when you sell the stock. Return with margin = -$29,662 Return without margin = $23,150 3. You sold short 500 shares of stock at a price of $45 and an initial margin of 60 percent. If the maintenance margin is 45 percent, at what share price will you receive a margin call? What is your account equity at this stock price? You will receive a margin call when the share price reaches $4.50, and your account equity at that point will be $20,250. 4. You purchased a stock at the end of last year at a price of $80. At the end of this year, the stock pays a dividend of $3.00 and you sell the stock for $90. What is your return for the year? Now suppose that dividends are taxed at 10 percent and long-term capital gains (over 11 months) are taxed at 35 percent. What is your after-tax return for the year? 1
Return ≈ 0.1625 or 16.25% Tax on capital gains = 35% * ($90 - $80) = $3.50 After-tax return ≈ 0.115 or 11.5% 5. Suppose you purchase 750 shares of stock at $55 per share with an initial cash investment of $22,000. If your broker requires a maintenance margin of 35 percent, at what share price will you be subject to a margin call? You will receive a margin call when the share price falls to approximately $83.81. Note: To meet a margin call, you can deposit additional cash into your trading account, liquidate shares until your margin requirement is met, or deposit additional marketable securities against your account as collateral. 6. Suppose you purchase 1,500 shares of stock at $52 per share with an initial cash investment of $39,000. The call money rate is 6 percent and you are charged a 2 percent premium over this rate. Ignore dividends. a. Calculate your return on investment one year later if the share price is $65. Suppose instead you had purchased $39,000 of stock with no margin. What would your rate of return have been now? Return without Margin ≈ 0.25 or 25% b. Calculate your return on investment one year later if the share price is $52. Suppose instead you had purchased $39,000 of stock with no margin. What would your rate of return have been now? Return with Margin (Share price = $52) = 6.24% Return without Margin (Share price = $52) = 0% c. Calculate your return on investment one year later if the share price is $42. Suppose instead you had purchased $39,000 of stock with no margin. What would your rate of return have been now? Return without Margin (Share price = $42) = -19.23% (a & b are done for you) Please complete C. Thank you 2
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