You purchase 290 shares of 2nd Chance Co. stock on margin at a price of $58. The

Question

You purchase 290 shares of 2nd Chance Co. stock on margin at a price of $58. The initial margin requirement is 80 percent.

Calculate the initial deposit. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

What would be the return if you had purchased the stock a) with margin and b) without margin under the following situations? (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 290 shares of 2nd Chance Co. stock on margin at a price of $58. The initial margin requirement is 80 percent.

Explanation / Answer

(i) Selling the stock at $74

Total selling price = $74*290 = $21,460

Gain on sale of share = $$21,460-$16,820 = $4,640

Return if stock purchased with margin = $4,640/$13,456 = 0.3448 = 34.48%

Return if stock purchased without margin = $4,640/$16,820 = 0.2759 = 27.59%

(ii)

Selling the stock at $45

Total selling price = $45*290 = $13,050

Loss on sale of share = $13,050-$16,820 = -$3,770

Return if stock purchased with margin = -$3,770/$13,456 = -0.2802 = -28.02%

Return if stock purchased without margin = -$3,770/$16,820 = -0.2241 = -22.41%

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