You are bullish on Telecom stock. The current market price is $15 per share, and

Question

You are bullish on Telecom stock. The current market price is $15 per share, and you have $3,000 of your own to invest. You borrow an additional $3,000 from your broker at an interest rate of 9.5% per year and invest $6,000 in the stock.

a. What will be your rate of return if the price of Telecom stock goes up by 11% during the next year? (Ignore the expected dividend.) (Round your answer to 2 decimal places.)

Rate of return             %

b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately. (Round your answer to 2 decimal places.)

Stock price falls below            $

Explanation / Answer

a. total return = 6000 * 0.11 - 9.5% of 3000 = 375

rate of return = 375/3000 = 12.50%

b. 70% = 3000

30% = 3000*30/70 = 1285.7143

loss = 3000 - 1285.7143 = 1714.2857

no. of shares brought = 6000/15 = 400

loss per share = 1714.2857/400 = 4.2857

so price = 15 - 4.2857 = 10.71

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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