Question

Suppose that XTel currently is selling at $50 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 10%. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $55; (ii) $50; (iii) $45?

Answer 1

XTel current market price = $50 per share Rate on the margin loan = 10%

Total Initial Investment = XTel current market price * Number of shares bought =  $50 * 500 = $25,000 Amount Borrowed = Total Initial Investment - Own money used = $25,000 * $15,000 = $10,000

Net worth = Current share value - Debt(Amount Borrowed) =  $25,000 - $10,000 = $15,000

(i). price of XTel changes to $55

Investment Value = $55 * Number of shares bought = $55 * 500 = $27,500

New Net worth = $27,500 - $10,000 = $17,500

Percentage increase in the net worth of your brokerage account = [New Net worth - Old Net worth] / Old Net worth

Percentage increase in the net worth of your brokerage account = [$17,500 - $15,000] / $15,000 = 16.67%

(ii). price of XTel changes to $50

Investment Value = $50 * Number of shares bought = $50 * 500 = $25,000

New Net worth = $25,000 - $10,000 = $15,000

Percentage increase in the net worth of your brokerage account = [New Net worth - Old Net worth] / Old Net worth

Percentage increase in the net worth of your brokerage account = [$15,000 - $15,000] / $15,000 = 0%

(iii). price of XTel changes to $45

Investment Value = $45 * Number of shares bought = $45 * 500 = $22,500

New Net worth = $22,500 - $10,000 = $12,500

Percentage increase in the net worth of your brokerage account = [New Net worth - Old Net worth] / Old Net worth

Percentage increase in the net worth of your brokerage account = [$12,500 - $15,000] / $15,000 = -16.67%