Robin wants to purchase 1,000 shares of Anatop, Inc., which is selling for $5 pe

Question

Robin wants to purchase 1,000 shares of Anatop, Inc., which is selling for $5 per share. Anatop does not pay dividends because all earning are reinvested in the firm to maintain its successful R&D department. The brokerage firm will allow Robin to borrow funds with an initial margin requirement of 70 percent and a maintenance margin fof 35 percent. The broker loan rate is 14 percent. Assum that Robin borrows the maximum allowed by the brokerage firm to purchase the Anatop stock.

A. How much of her own money must Robin provide to purchase 1,000 shares of Anatop?

B. To what price can Anatop drop before Robin will receive a margin call from her broker?

C. If the price of Anatop's stock is $7.50 in one year, what rate of return would Robin earn from her investment position?

D. If the price of Anatop's stock is $4 in one year, what rate of return would Robin earn from her investment position?

Please show calculations in order to follow how answer was obtained.

Explanation / Answer

A. Own money to be provided by Robin=1000*5*30%=1500

B. Anatop can drop till=1000*5*35%=1750

C. Robin earn=1000*7.5=7500

D. Robin would earn=1000*4=4000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.