You purchase 275 shares of 2nd Chance Co. stock on margin at a price of $53. You

Question

You purchase 275 shares of 2nd Chance Co. stock on margin at a price of $53. Your broker requires you to deposit $8,000.

Suppose you sell the stock at a price of $62. 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 $46 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 275 shares of 2nd Chance Co. stock on margin at a price of $53. Your broker requires you to deposit $8,000.

Explanation / Answer

Solution to Part 1:

Terminal Price = 62

Margin Price = 53

Deposit amount = 8000

Return without margin = (62-53)/53 = 6/53 = 16.98%Answer

Return with margin = ([(62*275) - (53*275 - 8000)] - 8000)/8000

                               = ((17050 - (14575-8000))-8000)/8000

                                =((17050 - 6575 - 8000)/8000

                                 = 2475/8000 = 30.93% Answer

Solution to part B:

Terminal Price = 46

Margin Price = 53

Deposit amount = 8000

Return without margin = (46-53)/53 = -7/53 = -13.21% Answer

Return with margin = ([(46*275) - (53*275 - 8000)] - 8000)/8000

                               = ((12650 - (14575-8000))-8000)/8000

                                =((12650 - 6575 - 8000)/8000

                                 = -1925/8000 = -23.06% Answer

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