Use the following information to answer Questions 16 to 20: A speculator opened an account with...

Use the following information to answer Questions 16 to 20: A speculator opened an account with her broker to purchase 5,000 shares of FSLR (First Solar) for $15 each. The initial margin requirement was 60%. The speculator financed the remainder of the purchase by taking out a loan that charges 10% annual interest. A year later the price of FSLR decreased to $10 per share and the stock did NOT pay any dividends. Assume no commissions.

16. What is the remaining margin in the account after one year?

17. If the maintenance margin requirement is 30%, will the speculator receive a margin call?

18. If the maintenance margin requirement is 20%, will the speculator receive a margin call?

19. What is the rate of return on the investment after one year?

20. What is the rate of return on the investment after one year IF no leverage was used (unlevered long position)?

Solutions

Expert Solution

1.
Margin
=5000*10-5000*15*(1-60%)
=20000.00

Margin %=20000/50000=40.0000%

2.
No as margin % is greater than 30%

3.
No as margin % is greater than 20%

4.
=(5000*10-5000*15-5000*15*(1-60%)*10%)/(5000*15*60%)
=-62.2222%

5.
=10/15-1
=-33.3333%

jeff jeffy answered 2 years ago

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