You purchase 260 shares of 2nd Chance Co. stock on margin at a price of $52. The
ID: 2805432 • Letter: Y
Question
You purchase 260 shares of 2nd Chance Co. stock on margin at a price of $52. The initial margin requirement is 80 percent. a. Calculate the initial deposit. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Initial deposit b. What would be the return if you had purchased the stock a) with margin and b) without margin under the following situations? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) ) Assume the stock price is $62 when you sell the stock. Rate of Return With margin Without margin (ii) Assume the stock price is $41 when you sell the stock. Rate of Return With margin Without marginExplanation / Answer
a.
Total Value of purchase = 260 × $52
= $13,520
Total value of stock purchase is $13,250.
Initial Margin = 80%
Initial Deposit = $13,520 × 80%
= $10,816.
Value of initial Deposit is $10,816.
Value of borrowed fund = $2,704.
b.
(I)
Sale price of stock = $62
Total Proceed from sale = 260 × $62
= $16,120
Total proceed from sale of equity is $16,120.
Value of borrowed fund = $2,704.
Net proceed after payment of borrowed fund = $16,120 - $2,704
= $13,416.
Net proceed after payment of borrowed fund is $13,416.
Return in case of margin = ($13,416 / $10,816) - 1
= 1.2404 - 1
= 24.04%
Return in case of margin is 24.04%.
(II)
Return without Margin = ($16,120 / $13,520) - 1
= 1.1923 - 1
= 19.23%
Return without margin is 19.23%.
c.
(I)
Sale price of stock = $41
Total Proceed from sale = 260 × $41
= $10,660
Total proceed from sale of equity is $10,660
Value of borrowed fund = $2,704.
Net proceed after payment of borrowed fund = $10,660 - $2,704
= $7,956
Net proceed after payment of borrowed fund is $7,956.
Return in case of margin = ($7,956 / $10,816) - 1
= 0.7356 - 1
= 26.44
Return in case of margin is 26.44%.
(II)
Return without Margin = ($10,660 / $13,520) - 1
= 0.7885 - 1
= 21.15%
Return without margin is 21.15%.
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