Chapter 11, Problem 9PA

Summary Introduction

To Determine:

The total cost, total value, amount borrowed and the contribution.

Introduction:

Loan is the amount or thing is taken from another person with the promise of future payment.

Explanation of Solution

Given,

Number of shares purchased is 250.

Price per share is $40

Margin is 505.

Formula to calculate total cost,

$\text{Total}\text{cost}=\text{Number}\text{of}\text{shares}\times \text{Price}\text{per}\text{share}$

Substitute 250 as number of shares and $40 for price per share.

$\begin{array}{c}\text{Total}\text{cost}=250\times \$40\\ =\$10,000\end{array}$

The total cost is $10,000.

Formula to calculate the amount borrowed,

$\text{Amount}\text{borrowed}=\text{Total}\text{cost}\times \left(1-\text{Margin}\right)$

Substitute $10,000 for total cost and 50% for margin.

$\begin{array}{c}\text{Amount}\text{borrowed}=\$10,000\times \left(1-50\%\right)\\ =\$10,000\times \left(1-0.5\right)\\ =\$10,000\times 0.5\\ =\$5,000\end{array}$

Hence, the amount borrowed is $5,000.

Formula to calculate contribution,

$\text{Contribution}=\text{Total}\text{cost}-\text{Amount}\text{borrowed}$

Substitute $10,000 for total cost and $5,000 for amount borrowed.

$\begin{array}{c}\text{Contribution}=\$10,000-\$5,000\\ =\$5,000\end{array}$

Hence, the contribution is $5,000.

Price of stock increased to $50.

Formula to calculate total cost,

$\text{Total}\text{cost}=\text{Number}\text{of}\text{shares}\times \text{Price}\text{per}\text{share}$

Substitute 250 as number of shares and $50 for price per share.

$\begin{array}{c}\text{Total}\text{cost}=250\times \$50\\ =\$12,500\end{array}$

The total cost is $12,500.

Formula to calculate the amount borrowed,

$\text{Amount}\text{borrowed}=\text{Total}\text{cost}\times \left(1-\text{Margin}\right)$

Substitute $10,000 for total cost and 50% for margin.

$\begin{array}{c}\text{Amount}\text{borrowed}=\$10,000\times \left(1-50\%\right)\\ =\$10,000\times \left(1-0.5\right)\\ =\$10,000\times 0.5\\ =\$5,000\end{array}$

Hence, the amount borrowed is $5,000.

Formula to calculate margin,

$\text{Margin}=\text{Total}\text{cost}-\text{Amount}\text{borrowed}$

Substitute $12,500 for total cost and $5,000 for amount borrowed.

$\begin{array}{c}\text{Margin}=\$12,500-\$5,000\\ =\$7,500\end{array}$

Hence, the contribution is $7,500.

Formula to calculate the profit,

$\text{Profit}=\text{Investment}\text{value}-\text{Contribution}$

Substitute $7,500 for investment value and $5,000 for the contribution.

$\begin{array}{c}\text{Profit}=\$7,500-\$5000\\ =\$2,500\end{array}$

Hence, profit earned by the investor is $2,500.

Stock price per share is $30.

Formula to calculate total cost,

$\text{Total}\text{cost}=\text{Number}\text{of}\text{shares}\times \text{Price}\text{per}\text{share}$

Substitute 250 as number of shares and $30 for price per share.

$\begin{array}{c}\text{Total}\text{cost}=250\times \$30\\ =\$7,500\end{array}$

The total cost is $7,500.

Formula to calculate the amount borrowed,

$\text{Amount}\text{borrowed}=\text{Total}\text{cost}\times \left(1-\text{Margin}\right)$

Substitute $10,000 for total cost and 50% for margin.

$\begin{array}{c}\text{Amount}\text{borrowed}=\$10,000\times \left(1-50\%\right)\\ =\$10,000\times \left(1-0.5\right)\\ =\$10,000\times 0.5\\ =\$5,000\end{array}$

Hence, the amount borrowed is $5,000.

Formula to calculate margin,

$\text{Margin}=\text{Total}\text{cost}-\text{Amount}\text{borrowed}$

Substitute $7,500 for total cost and $5,000 for amount borrowed.

$\begin{array}{c}\text{Margin}=\$7,500-\$5,000\\ =\$2,500\end{array}$

Hence, the contribution is $2,500.

Formula to calculate the profit,

$\text{Profit}=\text{Investment}\text{value}-\text{Contribution}$

Substitute $2,500 for investment value and $5,000 for the contribution.

$\begin{array}{c}\text{Profit}=\$2,500-\$5000\\ =\left(\$2,500\right)\end{array}$

Hence, loss earned by the investor is $2,500.

Conclusion

Hence, the value of the missing information has been determined.