Question

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Megan bought 200 shares of stock at a price of $10 a share, using a margin...

Megan bought 200 shares of stock at a price of $10 a share, using a margin loan of 30%. The maximum margin loan allowed by the margin lender is 60%. Megan sold her shares after a year for $12 a share. Using the information above to answer THE questions

Ignoring margin interest and trading costs, what is Megan’s return on investor’s equity for this investment?

A. 67%.

B. 29%.

C. 14%.

D. 10%.

Ignoring margin interest and trading costs, what is the maintenance price for this investment?

A. $5.

B. $7.

C. $8.

D. $7.3

Expert Solution

Value of position = 200(10) = $2,000

Margin put = 0.70(2,000) = $1,400

Profit = (12 - 10)200 = $400

Reuturn on Investment = 400/1,400

Return on Investment = 29%

At initial position,

Loan taken = $600

Maximum margin = 60%

Value of position at maintenance price = 700/0.60 = 600/0.60 = $1,000

Maintenance Price = 1,000/200

Maintenance Price = $5

jeff jeffy answered 2 years ago

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