Suppose that Xtel currently is selling at $40 per share. You buy 800 shares usin

Question

Suppose that Xtel currently is selling at $40 per share. You buy 800 shares using $25,600 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 10%.

a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to (a) $44; (b) $40; (c) $36? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

b. If the maintenance margin is 20%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Price            $

c. How would your answer to requirement 2 would change if you had financed the initial purchase with only $16,000 of your own money? (Round your answer to 2 decimal places.)

Strike price            $

d. What is the rate of return on your margined position (assuming again that you invest $25,600 of your own money) if Xtel is selling after one year at (a) $44; (b) $40; (c) $36? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

e. Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Price            $

Explanation / Answer

As per rules I will answer the first 4 subparts of the question

1:a Loan amount = 800*40 – 25600 = 6400

Net worth if price=44 = 800*44- 6400 = 28800

Change= (28800-25600)/25600 =12.5%

2: 1b Net worth if price=40= 800*40- 6400 = 25600

Change= (25600-25600)/25600 =0%

3:1c Net worth if price=36 = 800*36- 6400 = 22400

Change= (22400-25600)/25600 =-12.5%

4: b= Value of assets= 800P where P is the price of the shares

Liabilities= loan = 6400

Margin rate= Equity/Assets

= (800P-6400)/800P

Margin call if (800P-6400)/800P< 20%

800P-6400 = 160

P= $8.2

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