You are bullish on Telecom stock. The current market price is $400 per share, an

Question

You are bullish on Telecom stock. The current market price is $400 per share, and you have $25,000 of your own to invest. You borrow an additional $25,000 from your broker at an interest rate of 7% per year and invest $50,000 in the stock.

a. What will be your rate of return if the price of Telecom stock goes down by 12% during the next year? The stock currently pays no dividends. (Negative value should be indicated by a minus sign. Round your answer to the nearest whole number.)

Rate of Return is: ______ %

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.)

Margin call will be made at price ______ or lower

Explanation / Answer

a.

Total number of shares bought = $50,000 / $400 = 125 shares

Increase in value of investment = 50000 x 12% =$6000

Interest to be paid = 25000 x 7% = $1750

Rate of return = (Increase in investment - Interest paid) / Total of own contribution

Rate of return = (6000 - 1750) / 25000

Rate of return = 17%

b.

Let the Call price be “P”

(Number of shares x P - Own contribution) / Number of shares x P = 30%

(125P - 25000)/125P = 0.30

125P - 0.30 x 125P = 25000

P = 25000 / 87.5

P = $285.71

Margin call price = $285.71

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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