You purchase 500 shares of 2nd Chance Co. stock on margin at a price of $55. You

Question

You purchase 500 shares of 2nd Chance Co. stock on margin at a price of $55. Your broker requires you to deposit $16,000.

Suppose you sell the stock at a price of $59. 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 $53 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 500 shares of 2nd Chance Co. stock on margin at a price of $55. Your broker requires you to deposit $16,000.

Explanation / Answer

1. With margin, amount invested = $16,000

If stock is sold at $59, profit made = 500 * 4 = 2000

So return = 2000 / 16000 = 12.50%

Without margin, return = 2000/(500*55) = 7.27%

2. With margin, amount invested = $16,000

If stock is sold at $53, loss made = 500 * 2 = 1000

So return = -1000 / 16000 = -6.50%

Without margin, return = -1000/(500*55) = -3.64%

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