Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 3.9, Problem 1EQ
Suppose you sell short 100 shares of stock initially selling for $100 a share. Your initial margin requirement is 50% of the value of the stock. You receive no interest on The funds placed in your margin account.
a. How much do you need to contribute to your margin account?
b. What will be your
(assume the stock pays no dividends)? (i) $90; (ii) 100; (iii) 110.
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.Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
a.If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.13.
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
a. if you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: $22, $20, and $18? Assume that Xtel's pays no dividends.
b. If the maintenance margin is 25%, how high can Xtel's price rise before you get a margin call?
c. Redo parts a and b but now assume that Xtel has paid a year end dividend of $1 per share. The pruces in part a should be interpreted as ex-dividend, that is prices after the dividend has been paid.
Suppose that you sell short 1000 shares of Xtel, currently selling for $50 per share, and give your broker $40,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $55; (ii) $50; (iii) $46? Assume that Xtel pays no dividends. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)
b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call? (Round your answer to 2 decimal places.)
c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $2 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)
Chapter 3 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 3.8 - Suppose you by 100 shares of stock initially...Ch. 3.8 - Repeat Question 1 assuming your initial margin was...Ch. 3.9 - Suppose you sell short 100 shares of stock...Ch. 3.9 - Repeat Question t (b) but now assume that the...Ch. 3 - Prob. 1PSCh. 3 - What are some different components of the...Ch. 3 - Prob. 3PSCh. 3 - Prob. 4PSCh. 3 - In what cirecumstances are private placements more...Ch. 3 - Prob. 6PS
Ch. 3 - Prob. 8PSCh. 3 - How do margin trades magnify both the upside...Ch. 3 - A market order has: (LO 3-2) a. Price uncertainty...Ch. 3 - Where would an illiquid security in a developing...Ch. 3 - Prob. 12PSCh. 3 - Prob. 13PSCh. 3 - Prob. 14PSCh. 3 - Prob. 15PSCh. 3 - Old Economy Traders opened an account to...Ch. 3 - Prob. 17PSCh. 3 - Prob. 18PSCh. 3 - Prob. 19PSCh. 3 - Prob. 20PSCh. 3 - Prob. 21PSCh. 3 - Prob. 22PSCh. 3 - Prob. 23PSCh. 3 - Prob. 24CCh. 3 - Prob. 25CCh. 3 - Prob. 1CPCh. 3 - Prob. 2CPCh. 3 - Are all of the brokerage firms suitable ii you...Ch. 3 - Choose two of the firms listed. Assume that you...Ch. 3 - Prob. 4WM
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- An investor sells a stock short for $97 a share. The company pays a $4.70 annual cash dividend. After a year has passed, the seller covers the short position at $85. If the margin requirement is 57 percent, what is the percentage return earned on the investment?Redo the calculations, assuming the price of the stock is $103 when the investor closes the position.Based on your calculations to both scenarios, what generalization can be inferred?arrow_forwardYou buy a share of stock for $100 and it pays no dividend. A year later the market price is $105. What is the rate of return?arrow_forwardYou purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below what price? (Assume the stock pays no dividends and ignore interest on the margin loan.)arrow_forward
- A stock sells for $15 per share. You purchase 100 shares for $15 a share (i.e., for $1,500), andafter a year the price rises to $18.75 a) What will be the percentage return on your investment ifyou bought the stock on margin and the margin requirement was 65 percent? (Ignore commissions, dividends, and interest expense.) b) Rather than selling for $18.75, determine the percentage return on your investment if the price of the stock falls to $12.30 Based on your answers to both questions, what generalization on the use of marginaccounts can be inferred?arrow_forwardA speculator sells a stock short for $71 a share. The company pays a $2.50 annual cash dividend.After a year has passed, the seller covers the short position at $63. If the margin requirement is55 percent, what is the percentage return earned on the investment? Redo the calculations, assuming the price of the stock is $78 when the investor closes theposition. Based on your calculations to both scenarios, what generalization can be inferred?arrow_forwardYour friend told you about a stock that they think will see for $100 in one year. They do not pay a dividend yet and it selling for $161.3 today. What is the expected holding period return. Convert to a percent then round to 2 decimal places. Answer:arrow_forward
- Please need answerarrow_forwardAssume you purchase a share of stock for $50 at time t=0, and another share at $65 at time t= 1, and at the end of year 1 and year 2, the stock paid a $2.00 dividend. Also, at the end of year 2 you sold both shares for $70 each. What is the time-weighted rate of return? Give typing answer with explanation and conclusionarrow_forwardAn investor is considering purchasing a share of stock. Earnings are expected to be $6 per share and the price next year is expected to be $100. Suppose risk-free interest rates fall and the required rate of return decreases from 7% to 6%. Nothing else changes. What is new price the investor is wiling to pay for the stock? Answer in dollars and do not enter a $ sign. Round to two decimal places. please explain step by steparrow_forward
- 1) A reasonable way to put a value on a share of stock is to discount the stream of expected future dividends (annual payments to the shareholder) by the so-called opportunity cost of money (the interest rate you could get from the bank if you didn't hold on to the stock). If a share of stock is anticipated to pay a $5 dividend annually for the next five years and then $8 every year after that in perpetuity, what would the share be worth according to this model if the cost of money is 4%? Dividends are paid at the end of a year.arrow_forwardIf you originally bought a share of stock for $27, and in one year it paid a dividend of $4 and now costs $33. You sell the stock today for $33, what is your percentage return? (answer in percent, but without the percent sign, e.g. "8.25" is 8.25%)arrow_forwardSuppose that you just short sold 100 shares of Quiet Minds stock for $86.00 per share. Required: a. If the initial margin requirement is 60%, how much equity must you invest?arrow_forward
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY