You purchase 650 shares of 2nd Chance Co. stock on margin at a price of $48. You
ID: 2382917 • Letter: Y
Question
You purchase 650 shares of 2nd Chance Co. stock on margin at a price of $48. Your broker requires you to deposit $16,000.
Suppose you sell the stock at a price of $55. What is your return? What would your return have been had you purchased the stock without margin? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
What is your return if the stock price is $47 when you sell the stock? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
You purchase 650 shares of 2nd Chance Co. stock on margin at a price of $48. Your broker requires you to deposit $16,000.
Explanation / Answer
Solution-1
Calculation of Return with Margin:
Gain Per Share = $55 - $48
Gain Per Share = $7
Total Profit = 650 x $7
Total Profit = $4,550
Margin = $16,000
Return = $4,550 / $16,000 = 0.29 or 29%
With margin = 29%
Calculation of Return without Margin:
Total Price Paid = $48 x 650
Total Price Paid = $31,200
Total Amount Received on Sale = $55 x 650
Total Amount Received on Sale = $35,750
Total Profit = $4,550
Return = $4,550 / $35,750
Return = 0.1273 or 12.73%
Without margin = 12.73%
Solution-2
Calculation of Return with Margin:
Return = $47 - $48 x(650)
Return = $650 Loss
With margin = $650 / $16,000
With margin = 0.040 or 4.0%
Calculation of Return without Margin:
Total Price Paid = $48 x 650
Total Price Paid = $31,200
Without margin = 650 / $31,200
Without margin = 0.020 or 2.0%
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