Suppose you think that the market price of a share of Facebook will increase in
ID: 2804547 • Letter: S
Question
Suppose you think that the market price of a share of Facebook will increase in the next few months from its current price of $100 per share. Suppose as well that you have $5,000 to invest -- enough money to buy 50 shares. If you buy on margin, though, you can purchase an additional 50 shares for a total of 100 shares. (This assumes a 50% margin requirement.) If three months from now Facebook stock is worth $115 per share and you sell your shares, how much MORE money did you make by buying on margin compared to buying shares without the use of margin.
500Explanation / Answer
Current price per share=$100
Amount available for investment=$5,000
Without Margin:
Number of shares purchased=(5000/100)=50
Amount received after three month from selling the shares=$115*50=$5,750
With Margin:
Number of shares purchased with 50% margin=50/0.5=100
Loan amount=$5,000
Amount received after three months from selling =$115*100=$11,500
Loan amount repaid=$5,000
Amount available=(11500-5000)=$6,500
MORE money made by buying on margin=(6500-5750)=$750
Answer: 750
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