Question

Suppose that Xtel currently is selling at $44 per share. You buy 350 shares using $12,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 9%

. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $46.20; (ii) $44; (iii) $41.80? What is the relationship between your percentage return and the percentage change in the price of Xtel? (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 25%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to (b) change if you had financed the initial purchase with only $7,700 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position (assuming again that you invest $12,000 of your own money) if Xtel is selling after 1 year at: (i) $46.20; (ii) $44; (iii) $41.80? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends. (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.)

Answer 1