Homework 2 Question 1: (40 points, 10 points each) Suppose that Google shares cu
ID: 2541333 • Letter: H
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Homework 2 Question 1: (40 points, 10 points each) Suppose that Google shares currently is selling at $30 per share. You buy 1,000 shares using S20,000 of your money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 9%. What is the net percentage increase in your brokerage account if the pricc of Google shares immediately changes to (i) S24, (ii) S36? If the maintenance margin is 35%, how low can Google price fall before you get a margin ca a. b. c. What is the rate of return on your margined position (assuming again that you invest d. S20,000 of your own money) if Google is selling after one year at (i) S24, ii S362 Continue to assume that a year has passed. How low can Google's share price fall before you get a margin call? Hint: Consider the interest that you have to pay to the broker Question 2: (30 points.) Suppose thatyou sell short 1,000 shares of Google, currently selling for $30 per share and give your broker S20,000 to establish your margin account. a. If you do not carm any interest on the funds in your margin account, what will be your rate of return after one year if Google stock is selling at (i) $24, (ii) $36? Assume that Google pays a divident of $ 1.5 per share.Assume that the prices should be interpreted as after the dividend has been paid. (20 points) b. If the maintenance margin is 35% how high can Google's share prices rise before you get a margin call? (10 points) Question 3: (20 points) What type of trading order might you give to your broker in each of the following circumstances? You want to buy Google shares to diversify your portfolio. You believe that the share price is approximately at the fair' valuc, and you want the trade done quickly and cheaply. (6 points) You want to sell Google shares to realize your profit from your investment but believe that the current stock price is too low given the firm's prospects. If the shares could be sold at a price 5% higher than the current value, you would like to sell your shares. (7 points) You plan to purchase a house sometime in the next month and will sell your shares of Google to provide the funds for down payment. You don't expect a fall in the share prices. However you are worried that if share prices suddenly drop you may not be able to afford the purchase. While holding the shares at hand, you want to protect yourself against the risk of a big loss. (7 points) a. b. c.Explanation / Answer
A B C=A-B Current Stock Price Account Value Margin loan Account Equity $30 $30,000 $10,000 $20,000 a(i) Price Changed to $24 A B C=A-B Current Stock Price Account Value Margin loan Account Equity $30 $30,000 $10,000 $20,000 $24 $24,000 $10,000 $14,000 Percentage increase -30.00% (14000-20000)/20000 a(ii) Price Changed to $36 A B C=A-B Current Stock Price Account Value Margin loan Account Equity $30 $30,000 $10,000 $20,000 $36 $36,000 $10,000 $26,000 Percentage increase 30.00% (26000-20000)/20000 b Maintenance Margin 35% A B C=A-B D=0.35*A Current Stock Price Account Value Margin loan Account Equity Maintenance Margin $30 $30,000 $10,000 $20,000 $10,500 $20 $20000 $10,000 $ 10,000 $7,000 $19 $19,000 $10,000 $9000 $6,650 $18 $18,000 $10,000 $8,000 $6,300 $17 $17,000 $10,000 $7,000 $5,950 $16 $16,000 $10,000 $6,000 $5,600 $15 $15,000 $10,000 $5,000 $5,250 $14 $14,000 $10,000 $4,000 $4,900 $13 $13,000 $10,000 $3,000 $4,550 Margin call will be at the price of $15 when the account equity is less than Maintenance margin requirement c Rate of Return Initial Investment $20,000 Selling at $24 Account Value $24,000 Amount to be returned Principle $10,000 Interest $900 Total amount to be returned $10,900 Available amount $13,100 (24000-10900) Rate of Return -35% (13100-20000)/20000 Sellinin at $36 Account Value $36,000 Amount to be returned $10,900 Available amount $25,100 Rate of Return 26% (25100-20000)/20000 d PositionAfter one year: A B C=A-B D=0.35*A Current Stock Price Account Value Margin loan Account Equity Maintenance Margin $30 $30,000 $10,900 $19,100 $10,500 $20 $20000 $10,900 $ 9,100 $7,000 $19 $19,000 $10,900 $8100 $6,650 $18 $18,000 $10,900 $7,100 $6,300 $17 $17,000 $10,900 $6,100 $5,950 $16 $16,000 $10,900 $5,100 $5,600 $15 $15,000 $10,900 $5,000 $5,250 $14 $14,000 $10,900 $4,000 $4,900 $13 $13,000 $10,900 $3,000 $4,550 Margin call will be at the price of $16 when the account equity is less than Maintenance margin requirement
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